The Federal Reserve doesn’t directly set interest rates, but its actions eventually impact all corners of the financial market, from credit cards to loans and mortgages. When the Fed votes to increase the benchmark interest rate -- which it did on March 22, by 0.25% -- it inevitably drives up credit card annual percentage rates.
In an effort to tamp down inflation, the Fed -- the US central bank, which is in charge of monetary policy -- has increased the federal benchmark interest rate nine consecutive times.
In the latest Consumer Price Index report, the US Bureau of Labor Statistics measured February inflation at 6 percent year over year, down from 6.4 percent in January and its high of 9.1 percent in June. Though inflation has been steadily cooling over the past eight months, it’s still well above the Fed’s target range of 2%.
Following its 25 basis points (bp) -- or quarter of a percentage point -- increase in February, the Fed voted once again to raise interest rates by another 25bp in March. The increase pushes the federal funds rate to a range of 4.75% to 5% -- the highest it’s been since 2007.
The recent banking crisis could complicate further rate increases. The Fed indicated its stance on the matter could change. However, if the Fed continues to increase the benchmark rate, credit card interest rates will continue to rise. The average credit card APR is currently higher than 20%, and this latest interest rate hike will push it even higher.
Below, we break down the role of the Federal Reserve, and how its interest rate changes can affect your credit cards’ APRs.
The role of the Federal Reserve
The Federal Reserve is in charge of setting the monetary policy for the US. It aims to bolster labor and stabilize the country’s economy. One such way that it can do that is by adjusting the federal interest rate, or the rate at which banks can borrow and lend funds. When the Fed increase rates for banks, it in turn increase the interest rate for people, which is why credit card interest rates and savings account annual percentage yields go up.
Factors that influence credit card rates
By raising the federal funds rate -- the overnight interest rate between banks -- a domino effect causes credit card APRs to increase. Though the federal funds rate only directly dictates lending between banks, this affects the banks’ costs, which are in turn passed on to consumers.
The prime rate, which is the basis for all borrowing rates for bank customers, is derived from the federal funds rate. Premiums are tacked onto it depending on an applicant’s creditworthiness and institutional factors. This yields effective interest rates, such as credit card annual percentage rates.
But when should you expect credit card rates to rise? Credit card APRs are adjusted almost immediately, usually within a billing cycle or two. You’ve probably already been subject to new APRs from previous rate hikes without even realizing it.
What rising interest rates mean for you
“Typically, your credit card rate will move in tandem with Fed actions within a statement cycle or two,” said Ted Rossman, a senior industry analyst at Bankrate, which is owned by CNET’s parent company, Red Ventures.
Every card issuer has slightly different rules about changing cardholder APRs; the increase usually depends on your billing cycle. But you may see the impact of the Fed’s rate hike in your next few statements.
And while a quarter-percentage point won’t impact your rate dramatically, the series of increases over the past year plus will take its toll, Rossman said.
“If someone only makes minimum payments toward $5,805 in credit card debt (the national average according to TransUnion) at 20.05% (the current national average according to Bankrate), they’ll be in debt for 208 months and will owe $8,257 in interest,” he said. “At 16.34% (the average credit card rate a year ago), they would have been in debt for 200 months with a total interest bill of $6,628.”
Are credit cards still worth it?
With interest rates increasing once again, credit cards have become an increasingly expensive financial tool -- depending on how you use them, according to Rossman.
“If you’re able to pay in full and avoid interest, life is great. You get better rewards and better buyer protections than other payment methods. But the one big drawback of credit cards is the high-interest rates,” he said.
“If you have credit card debt -- and no shame, a lot of people do -- put your interest rate first. Don’t pay 20% interest just to get 2% in cash back or airline miles.”
A credit card that earns a solid return for gas or groceries could be a good way to limit inflation’s impact on your finances, especially for everyday purchases you have to make, no matter the price. But you’ll only get the most from the card so long as you can pay your balance in full each month, avoiding any interest charges caused by the higher interest rate.
However, so long as you’re paying more than the minimum, earning a return on these purchases can still help lower your expenses with card rewards.
How to minimize the impact of increasing interest rates on your credit cards
So what should you do right now? Here are seven steps you can take to pay your credit card balance and save money.
1. Pay off, or at least down, any existing credit card debt
According to Experian, the collective credit card debt in the US in the first quarter of 2022 was $824.8 billion, with the average credit card debt clocking in at $5,589. If you’re looking for a way to pay down high-interest credit card debt, here are some strategies that could help lower your balance.
The first step to paying off your debt is simple: Apply any disposable income to credit card debt. (And if you don’t have enough disposable income, don’t panic.)
Where to begin? The average US consumer has around three credit cards, so there’s a chance your credit card debt is spread across multiple balances. There are two popular methods for paying down multiple balances: the snowball method and the avalanche method.
- The snowball method suggests paying off your smallest debt first, regardless of its interest rate, and letting your initial success carry you until you pay the debt with the highest balance. Proponents of this method argue that this strategy allows you to create a snowball effect that encourages you to pay off multiple debts.
- The avalanche method, on the other hand, proposes that you start with the debt with the highest interest rate. Once you’ve paid off that high-interest balance, you move on to the balance with the next highest interest rate, and so on.
Which method is better? Avalanche method fanatics -- and many personal finance experts -- will tell you that paying off high-interest debt first makes more sense from the financial standpoint. They say the faster you pay debt this way, the more money you’ll save in interest over time. But if paying off that debt will take you years, you may be discouraged by what seems like minimal progress for maximum effort. You might end up throwing in the towel and keep accruing debt.
My advice is to go with the method that’ll keep you going, whether it’s snowball, avalanche or a combination of both. In the end, what’s important is to save money by avoiding interest charges.
2. Transfer your balance to a 0% APR credit card
If you have a good credit score, you may be eligible to apply for a balance transfer credit card. The best balance transfer cards let you transfer a balance from another card -- as long as it’s from a different bank -- and pay it with no interest for a set period of time, usually between 12 and 21 months.
“My top tip for anyone carrying a balance is to sign up for a 0% balance transfer card,” Rossman said. “You can move your existing, high-cost debt from one or more cards over to one of these cards and potentially save hundreds or even thousands of dollars in interest charges.”
The trick is to pay off your balance within the introductory period. And don’t make new purchases while paying down the transferred balance.
Rather, hatch a plan. Divide the transferred balance -- say $3,000 -- by the promotional period, 18 months. With these numbers, you’d need to pay at least $167 monthly to pay it down within the given timeframe. However, if you can, pay more. If you’re unable to pay down the balance in time, it could be stuck with a substantial APR.
Consider fees when shopping for a balance transfer card. Most cards charge a balance transfer fee, usually 3% to 5% of the amount transferred, though some cards charge no balance transfer fees.
For a balance of $3,000 with a 3% balance transfer fee (the industry standard), you’d pay an extra $90. But that cost will typically be far less expensive than continuing to pay interest charges on another card.
3. If you need more time than a 0% APR card can provide, consider a personal loan
“0% balance transfer cards are my favorite debt payoff technique, but if you need more time, a personal loan might make more sense,” Rossman said. Personal loans have lower, fixed interest rates than credit cards, especially if you have good credit. It won’t be as low as 0%, but it could be relatively close.
Personal loans could provide five to seven years for you to pay down the balance. Apply for the loan, and use the funds to pay off your credit card.
For people with poor or limited credit, consider a reputable non-profit credit counseling agency, Rossman said. They provide helpful strategies for reducing debt with low fees.
4. Focus on paying down card debt, not on earning points or cash back
Every savvy cardholder’s dream is earning cash back, points and miles on everyday purchases and redeeming them for free trips or the newest smartphone. But if you’re carrying a balance on your credit cards and keep charging expenses you can’t pay at the end of the month for the sake of earning points, you need to stop immediately.
Here’s why. As mentioned, the current average interest rate is above 20%. Some of the best credit cards earn up to 6% back in rewards per dollar spent on specific categories, like grocery store purchases or airline tickets. However, most of the best flat-rate cash-back cards earn no more than 2%. Any cash-back, points or miles earned will be easily wiped out by interest if you don’t pay for your purchases in full when your statement is due.
If you carry a balance, there’s a way to put those hard-earned cash-back dollars to good use. Use them to lower the balance on your card instead by redeeming them for a statement credit.
5. Consider additional sources of income to pay off credit card debt
But what if you don’t have any additional cash at the end of the day, or the month, to pay down card debt?
That might be why you got into debt to begin with -- and that’s OK. We’ve all been there. But adding an extra source of income can help you tackle any debt faster, including your credit card’s.
Here are a few ideas you can try to earn more disposable income and pay down credit card debt:
- Take on a side gig. Are you good at math or fluent in a foreign language? Tutoring can be a viable option for a side job. Do you have free time during the week and a car in good condition? You might want to consider Uber, Lyft or DoorDash. Many successful Etsy stores started as a side hustle. Consider an activity you enjoy and make sure to follow these tips, as taking on a side gig might have tax implications.
- Rein in your expenses. It may sound obvious, but it’s not that simple. According to the Federal Reserve, almost 40% of Americans don’t have $400 in emergency cash. Whether this is your case or not, maybe it’s time to align your expenses with your income, create a budget and stick to it. The good news is that you can add paying down card debt as one of your ongoing expenses, and you don’t have to create a budget from scratch or manage it all on your own. The best budgeting apps can help keep track of your spending and identify expenses to cut back.
- Sell stuff you don’t use that’s just sitting around the house. From that dress you wore only once at a wedding to the portable sauna you got for your birthday but never fire up, selling items both used and new online can help you earn the extra cash you might need to pay off credit card debt. There are plenty of places to do that. The Penny Hoarder has a good roundup of 14 websites and apps for selling stuff online.
6. Stop using your credit card and switch to cash or a debit card
Credit cards are great financial instruments to pay for large or unexpected purchases over time, improve your credit, earn points or cash back for trips or dream buys, or even give you access to generous travel benefits, like airport lounges or priority security access. But they can also tempt you to overspend and incur debt quickly if you don’t manage them responsibly.
If you find yourself spending more when using a credit card, maybe it’s time to give plastic a break. Studies suggest that paying with a credit card might lead to overspending because the “pay pain” is removed from the transaction. In other words, when you charge a purchase on your credit card, the money doesn’t leave your wallet or bank account right away, which may mislead you into thinking you can afford whatever you’re buying.
Switching to cash might be more difficult than before, especially since many businesses during the pandemic switched to contactless payments or stopped accepting cash for safety reasons.
However, you could use a P2P payment app, like Venmo or Zelle, or your debit card. That way, the moment you make a purchase or pay a bill, the money gets instantly withdrawn from your bank account, helping you better understand how much you’re spending.
7. Leverage your credit with a zero percent credit card
If you don’t carry a balance on your credit card right now, congratulations! But if you have good credit, you might still want to consider applying for a no-interest credit card. Even if you pay your balance in full every month, there may be some benefits in the midst of rising interest rates. You can pay for a big-ticket purchase interest-free or have a zero-percent card on hand in case of emergency.
Improving your credit utilization ratio and upping your number of accounts by opening a new credit card can be beneficial for your credit score, too. This type of simple move could be beneficial for you in the long run, particularly if you plan to finance a home, auto or other big purchase in the future.
More credit card advice
- How To Get Out of Credit Card Debt
- Best Credit Cards for Paying Off Debt
- Best Low APR Credit Cards
- Best Gas Credit Cards
- Best Grocery Credit Cards
- Best Debt Consolidation Lenders
This article includes some material that was previously published on NextAdvisor, a CNET Money sister site that was also owned by Red Ventures and which has merged with CNET Money. It has been edited and updated by CNET Money editors.