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The Federal Reserve’s Open Market Committee announced a widely expected hike of a key interest rates this Wednesday and dropped strong hints it would do so twice more this year. Bumping the short-term interest rate from 1.75% to 2% affects the cost of borrowing for a wide range of financial products Americans depend on, but the influence isn't distributed equally.
Those who carry a balance on a variable rate credit card will see the results of the hike as soon as when the next billing cycle takes effect, and while the increase won't be earth-shattering, neither is it welcome for people who want to keep more money in their wallets—which is everyone.
The simplified explanation for the bigger credit card bill is that the rates are indirectly tied to the Fed’s moves. Most credit cards have a variable interest rate that is pegged to a series of other interest rates used by banks that ultimately take their cues from the interest rate the Federal Reserve places on transactions between banks that occur overnight.
When the Fed raises the interest rate on these overnight transactions—which it just did—then banks pass on the cost to their lenders.
For credit card users, that means the APR on the cards issued by banks increases at about the same rate as the Fed's interest rate bump, which in this case is 0.25%. For example, if you're carrying a balance of $7,000 on your credit card that charges a 15% APR you currently have to pay about $87 in interest each month.
If your APR goes up to 15.25%, that means your interest each month on the same balance would be closer to $89—which is not the kind of increase that causes you to pull your kid out of college or start thinking selling a family heirloom.—however, if the Fed continues to raise the interest rates, which by all accounts is the plan, then all of those little hikes to your credit card bill can start to add up to real money.
The article, What the Fed's Interest Rate Hike Means for Your Credit Card Debt , originally appeared on ValuePenguin.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
