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Putting your shopping on plastic is about to cost you even more.
The Federal Reserve is expected to raise rates three or four times this year, starting in March. This means that anyone who carries a balance on their credit card will soon have to cough up more money just to cover interest charges.
Most credit cards have a variable rate, so there is a direct link to the Fed’s benchmark. As the federal funds rate rises, the prime rate also rises, and credit card rates follow. Cardholders see the impact within a billing cycle or two.
Today, the average consumer has a credit card balance of $5,525, according to Experian, and pays an annual percentage rate of around 16%, which is high but still cheap by historical standards.
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However, with several rate hikes on the horizon, credit card rates will be back around 17% by the end of the year, not far from the pre-pandemic peak, according to analyst Ted Rossman. industry leader at CreditCards.com.
“If you’re a consumer paying those tariffs, it’s expensive.”
And yet most credit card users who have a balance don’t even know the interest rate they’re being charged, according to a separate survey by The bank rate find.
To put it into context, if you only made the minimum payments on an average credit card balance, it would take more than 16 years to get you out of debt and cost you more than $6,000 in interest alone, Rossman calculated.
If your annual percentage rate increases – even by less than one percentage point – in 2022, it will cost you $300-400 in additional interest during that time.
Meanwhile, Americans are spending more as the economy rebounds from the Covid pandemic.
After paying off record $83 billion in credit card debt in 2020, helped by government stimulus checks and fewer discretionary shopping opportunities, credit card balances are rising again.
Overall, credit card balances increased by $17 billion in the third quarter of 2021, according to the most recent data from the Federal Reserve Bank of New York.
In November alone, sales jumped 23%, Fed says consumer credit report and revolving debt, which is primarily based on credit card balances, has now topped $1 trillion.
“Since rates are really going to go up, people’s credit card debt is only going to get more expensive,” said Matt Schulz, chief credit analyst for LendingTree. “Now is the time to take some kind of action.”
Borrowers could call their card issuer and ask for a lower rate, switch to an interest-free balance transfer credit card, or consolidate and pay off high-interest credit cards with a home equity loan or a personal loan, Schulz advised.
The good news is that there are still plenty of zero percent balance transfer offers out there, Schulz said.
Cards offering 15, 18 and even 21 months interest-free on transferred balances are “absolutely worth considering for anyone deeply in debt.”
Alternatively, the interest rate on a home loan is as low as 4% while a personal loan is closer to 10%, on average. But either way, consolidation has the added benefit of allowing you to simplify unpaid debt while lowering your monthly payment, Schulz said.