How a Fed Hike Could Hurt Your Credit Card Debt

Any rise in the federal funds rate will flow into most credit card annual percentage rates.

All Eyes on Yellen as Markets Await Rate Decision

It’s the anti-holiday gift: As consumers rack up credit card charges on presents, vacations, and dinners for the holidays, card issuers are poised to raise the annual percentage rate on their cards.

Card issuers are waiting to see if the Federal Reserve’s policy-setting committee bumps up the federal funds rate this week, as many expect. If it does, the hike will flow through to many credit card holders as soon as they receive their next bill.

That’s because the peg for most variable-rate consumer borrowing, whether credit cards, adjustable-rate mortgages, or home equity lines of credit, is the prime rate. And that rate moves with the federal funds rate. Prime is 3.25 percent today, and card issuers add a certain percent on top of it to set the annual percentage rate (APR).

A 0.25 percent increase in an APR is a nonissue for people who pay off balances. But for those who carry a balance month to month, it affects the entire balance, not just new purchases. If this is the start of a series of rate hikes, it could make paying off a big balance take longer—and cost more. The Consumer Financial Protection Bureau estimates in a recent report that a quarter-point rise in the federal funds rate would cost cardholders $1 billion annually, and a full percentage-point hike almost $6 billion.

The good news? In most cases, if you got a promotional rate on a balance transfer, that rate is fixed. So anyone who’s taken advantage of such offers wouldn’t see their transferred balance affected by rate increases until the promotional period ends.

If you’re carrying a big balance on a card with a double-digit APR, there are still plenty of offers out there to transfer balances at a zero percentage rate, fixed, for a year or more. The average length for zero percent offers is a year, although Citi has a 21-month offer, said Brian Riley, principal at research and advisory firm CEB TowerGroup.

The length of offers could shrink, or the fees could climb, if there’s a series of hikes in the federal funds rate. It will take more than a quarter-point rise to bring much change, though, said Odysseas Papadimitriou, chief executive officer of cardhub.com and wallethub.com. “I’d expect those zero percent fixed introductory rates to stay the same—unless the Fed goes aggressive and raises by 50 basis points,” he said.

Consumers with strong credit records can always call their card’s issuer to see if they qualify for a lower rate. Just be sure your credit is currently as good or better than it’s been in the past. If issuers find your financial situation has deteriorated when they check your record, they can cut your credit limit, or decide they don’t want you as a customer anymore. And that would not make for happy holidays.

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