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with average credit card interest rate now hovering above 23%, millions of Americans are finding it harder to keep up with their monthly credit card payments. Typical cardholders have close to $8,000 in credit card debt now and today’s high average card rates mean that interest costs are increasing rapidly. As a result, many cardholders are hoping to get relief in the form of low rates – especially now that the Federal Reserve has started to cut benchmark rates.
Unfortunately, recent changes in the economic situation we are facing can complicate things. While inflation has fallen in recent months, the latest data shows that the inflation rate actually increased in October, up 2.6% on an annual basis. This marked a slight increase from the 2.4% rate in September, which is when the Federal Reserve began cutting interest rates to address weak consumer prices and a weak labor market. That causes concerns about where interest rate trajectory can go next.
So, will credit card interest rates go up now if inflation goes up? Or will cardholders get the relief they need from today’s high-stakes credit card environment? Below, we’ll break down what you need to know.
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Will credit card interest rates increase now that inflation is rising?
There is a strong possibility Credit card interest rates can increaseand if they do, the uptick will likely be driven in part by the new inflationary trend. After all, credit card interest rates have risen steadily over the past several years due to a combination of increases in benchmark rates set by the Federal Reserve and rising borrowing costs. While the Federal Reserve does not directly set credit card interest rates, these policies affect rates which banks use when determining what to charge on revolving products like credit cards.
That said, credit card interest rates are generally based on the bank’s prime rate, which is the rate at which banks lend to each other overnight. When the Fed raises the federal funds rate to manage inflation, it usually causes the prime rate to rise, which then affect credit card rates. Given the recent uptick in inflation, credit card rates could rise in response to any Fed decision to increase the federal funds rate to combat inflationary pressures. For borrowers, this means higher fees for maintaining credit card balances.
However, credit card rates don’t just depend on the Fed’s actions. Most credit cards have a variable APR that is calculated by adding a margin to the prime rate. This margin, which can range from 10 to 20 percentage points or more, is determined by factors such as the owner’s credit card, card features and the issuer’s business strategy. As a result, even during periods of stable prime rates, credit card interest rates can fluctuate based on these additional factors.
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How to lower credit card interest rates today
With potential rate hikes on the horizon, credit card debt holders may want to consider options to lower interest rates. For those facing high balances, some debt relief options can help reduce the overall cost of credit card debt and ease monthly payments.
One of the effective options to reduce the interest of the credit card through balance transfer to a card that offers an introductory 0% APR. Many credit card companies offer promotional periods of 12 to 21 months with no interest on transferred balances. By transferring high-interest debt to a 0% APR card, borrowers can pay down their principal balance more effectively without incurring additional interest. That said, it’s important to understand the terms, as some balance transfer cards do charge a fee of 3% to 5%. which can affect savings.
another path is fine debt consolidation loan through creditors or debt relief agency. These loans can consolidate multiple credit card balances into one loan with a fixed interest rate, which is often lower than regular credit card rates. As a result, monthly payments can be lower and more predictable, allowing borrowers to move toward paying off their debt without the compounding interest typically associated with credit cards.
Debt management plan also offers borrowers a structured way to manage and reduce their debt. With a debt management plan, credit counselors work with creditors to negotiate lower interest rates and waive certain fees. The borrower then makes a single monthly payment to the credit counseling agency, which distributes the funds to the lender. This approach can be beneficial for individuals who feel overwhelmed by managing multiple credit card payments and are looking for a structured path to becoming debt free.
Bottom line
In the face of inflation and the potential for credit card rates to rise, it is important to explore options that can provide financial assistance and prevent interest costs from compounding further. As the economic landscape continues to change, taking proactive steps to lower credit card interest rates and manage debt can provide important financial security for many households.
