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What the Federal Reserve’s Vote on Interest Rates Means for Your Credit Cards

Rates could drop in 2024, but the sooner you start chipping away at your card balances, the better.

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The Federal Reserve voted Jan. 31 to once again hold the benchmark interest rate steady.

“The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run,” the Fed said in a statement. Until it has a better idea of whether the economy is continuing to move toward that 2% inflation rate, the central bank likely won’t reduce the target range.

It’s the fourth time in a row the Fed has voted against increasing the federal interest rate since beginning its aggressive strategy in March 2022 to combat inflation. The federal benchmark interest range has sat at 5.25% to 5.5% since July 2023, but the average APR on a credit card has continued creeping up, currently hovering near 21%, according to Bankrate, CNET’s sister site.

The Fed has increased rates 11 times to rein in rampant inflation, but slowed its pace in the back half of the year as it watched how the economy was responding to the rate increases. Inflation declined to 3.1% for November year over year, but increased slightly to 3.4% in December -- still down from 6.5% in Dec. 2022. But it remains above the Fed’s 2% target. 

So what does all of that mean for your credit cards? Well, the Fed’s pause in hikes continues to give consumers an opportunity to pay down some of their existing credit card debt. The average interest rate on credit cards still hovers near 21%, meaning it’s a good idea to chip away at any card balances you may have.

Fed officials set the stage for multiple rate cuts in 2024 and voted nearly unanimously that the policy rate will be lower by the end of 2024 than it is now. The next meeting is scheduled for March.

The impact of the Federal Reserve on your card’s APR

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. When inflation is high, the Fed’s main course of action is raising the federal interest rate, or the rate at which banks can borrow and lend funds.

By raising or lowering the federal funds rate -- the overnight interest rate between banks -- a domino effect can lead credit card issuers to increase or decrease their APR. Though the federal funds rate only directly dictates lending between banks, this affects the banks’ costs, which are in turn passed on to consumers, affecting interest rates on consumer products, like loans and credit cards.

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 how soon after the Feds change benchmark interest rates should you expect your credit card rates to rise or fall? Credit card APRs are adjusted usually within a billing cycle or two. You’ve probably already been subject to new APRs from previous rate hikes, maybe without even realizing it.

What a higher APR means for you

Every card issuer has slightly different rules about changing cardholder APRs; the increase usually depends on your billing cycle. When the Fed raises rates, you’ll usually see the impact on one of your next few statements if you carry a balance on your card.

“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 CNET sister site Bankrate.

The rate hike from July’s meeting led to even higher APRs on credit products. On July 26 -- the day of the last Fed rate hike -- credit card APRs averaged 20.50%, according to Bankrate. APRs rose to 20.74% as of Dec. 20 and have remained there as of Jan. 31.

With rates this high, there’s no time to waste if you want to whittle away at credit card debt. A good way to get started is by making more than the minimum payment each month. This can help you pay down your debt years sooner and may save you hundreds to thousands in interest, depending on your balance.

Are credit cards still a good idea?

With interest rates still high, 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,” he said. “But the one big drawback of credit cards is the high-interest rates.

“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 get the most from the card only if 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 protect your finances from high credit card interest rates

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

Credit card balances rose 4.7% to $1.08 trillion during the third quarter of 2023, according to the Federal Reserve. 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 continue 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 time frame. However, if you can, pay more. If you’re unable to pay down the balance in time, you 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 paying interest charges on another card. 

3. If you need more time than a 0% APR card can provide, consider a personal loan

If you need more time than a balance transfer offer allows, personal loans 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 nonprofit 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 should stop immediately.

Here’s why. 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.

Here are a few ideas to 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, since 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, it might be 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 that’s collecting dust, 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, such as 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 see how much you’re spending.

7. Leverage your credit with a 0% 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 0% credit card on hand in case of emergency

Lowering your credit utilization ratio and opening a new credit card may improve your credit score too. This 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

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.

The editorial content on this page is based solely on objective, independent assessments by our writers and is not influenced by advertising or partnerships. It has not been provided or commissioned by any third party. However, we may receive compensation when you click on links to products or services offered by our partners.

Evan Zimmer has been writing about finance for years. After graduating with a journalism degree from SUNY Oswego, he wrote credit card content for Credit Card Insider (now Money Tips) before moving to ZDNET Finance to cover credit card, banking and blockchain news. He currently works with CNET Money to bring readers the most accurate and up-to-date financial information. Otherwise, you can find him reading, rock climbing, snowboarding and enjoying the outdoors.
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