Your Credit Card Debt Is Getting More Expensive Because of the Latest Fed Rate Hike. Here’s How You Can Prepare

A photo to accompany a story about the Fed's rate hikes Getty Images
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Interest rates are steadily rising, and experts say you’ll soon feel the effects on your credit card balance. 

This week, the Federal Open Market Committee increased its target federal funds rate range from 2.25%-2.5% to 3% – 3.25% and expects more increases to come this year. That marks the fifth increase since March.

The Federal Reserve cited inflation being the main cause for another rate hike, The latest statement also credits the Ukraine-Russia war and supply and demand imbalance to the rate increase — which will, once again, affect everything from HELOCs and home equity loans to the price of Bitcoin and credit cards.

Experts say the increase will mean higher APRs and longer debt payoff periods for cardholders. And that’s amid already-growing credit card debt — between the third and fourth quarters of 2021, credit card balances increased by $52 billion nationwide. The average American credit card balance was $5,525 in 2021.

“It’s very important that people are aware that their credit card rate is going to go up,” says Beverly Harzog, a credit card expert and consumer finance analyst for U.S. News & World Report. “And if you do have credit card debt, it’s time to take steps to get rid of that.”

Here’s how your card accounts may soon be affected, and what you can do now to mitigate rising credit card interest rates.

How Interest Rates Affect Your Credit Card APR

The Fed’s decision to increase its target rate is meaningful for cardholders because the prime rate — which most credit card variable APRs are based on — is tied to the federal funds rate. When the prime rate goes up, credit card interest rates do, too. 

If you pay your balance on time and in full each month, avoiding interest, an APR increase may not mean much. 

But if you’re already carrying a credit card debt balance, a higher APR can prolong the amount of time it takes to pay it off, and the total interest you’ll pay over that time — especially if you have less-than-stellar credit. If your card’s variable APR is between 16% and 24%, you’re most likely to get the lower end of that range if you have excellent credit. If you have a lower score, you may pay the higher end of the variable rate. 

What Rising Interest Rates Mean for You

New, higher rates will apply to almost all credit card borrowers within a month or two, predicts Ted Rossman, senior industry analyst at CreditCards.com, which is owned by Red Ventures, like NextAdvisor. Every card issuer has slightly different rules about changing cardholder APRs, and the increase usually depends on your billing cycle. But you may see a difference as early as your next statement or the one after. 

As for how much higher your APR will be, don’t expect a drastic change — at least not yet.

Rossman does predict credit card issuers may increase APRs a bit more than the Fed’s rate hike to offset their own risk.

But this latest rate increase won’t be the last. Already, the Fed said it “anticipates ongoing increases…will be appropriate.” 

Today, the average credit card APR is around 16%, but Rossman says more rate increases this year could push the average credit card interest rate over 18%. 

“Be prepared for…several rate increases,” Harzog says. “That’s more than enough incentive than you need to start paying down that debt you have, and if you don’t have credit card debt count yourself lucky right now.” 

Pay Down Existing Debt Now

Credit card interest rates are already sky-high, and increasing rates only means it could get more difficult to pay off your debt. “A year from now, if you’re carrying debt and making minimum payments — whether it’s 16%, 17%, or 18% — you’re racking up a lot of interest,” Rossman says. “It’s likely to get worse.”

A balance transfer credit card is a great tool to pay off your debt. Even if you cannot pay the balance before the introductory period ends, it can put a huge dent in your credit card debt if you’re paying as much as possible each month, says Harzog.

Even small rate APR increases can result in more debt, which a balance transfer can help you offset. For instance, say you have the average $5,525 debt balance on a card with the average 16% variable APR.

Here’s a breakdown of how much you’ll pay if you make a 3% minimum payment with your current interest rate over time, compared to how much more you may pay if your rate increases by 0.75%. You’ll also see the result of using a balance transfer card with a 21-month intro period and 3% balance transfer fee, paid off before interest kicks in.

Current Average APRCurrent Average APR + 0.75%Balance Transfer Paid in Full
Monthly payment$165.75$165.75$270.99
Time to pay off187 months193 months 21 months
Interest paid$4,186$4,549.83$0
Fees paid $0$0$165.75
Amount paid in full$9,711.65$10,074.83$5,690.75

Before you start, create a plan to pay as much as you can toward your balance before the introductory period ends. Review all of your monthly expenses to see how much more you can contribute to your debt.

If you don’t qualify for a balance transfer card, consider seeking help from a nonprofit credit counselor to consolidate your debt and get a lower interest rate.  

If neither option works for you, paying off debt the old-fashioned way still works, says Harzog. Streamline your monthly budget to ensure you can dedicate as much toward your balance as possible, look for ways to cut expenses or increase income, and use a debt payoff technique like the snowball or avalanche method