With the Federal Reserve’s recent decision to increase its benchmark interest rate comes many questions. Chief among them for many individuals is how this Fed rate hike might affect their credit card debt.
Where does this question come from? Well, the Fed rate hike decision is a big one for many types of debt. In the case of credit cards, this is even more true than other forms of debt such as mortgages and student loans.
That’s because most credit cards have annual percentage yields (APYs) that are based on the prime rate. The prime rate is the rate used for variable loans, such as credit card debt and variable mortgages.
This prime rate is also based on the federal funds rate, which was just moved from the 0%-0.25% range to the 0.25%-0.5% range on Wednesday.
Let’s dive into what this means for those with credit card debt.
How Does the Fed Rate Hike Impact Credit Card Debt?
Most personal finance experts will tell individuals that credit card debt is the worst type of debt to have. That’s because these lines of credit can be continuously reloaded and carry sky-high APYs. Right now, most credit cards have APYs in the 16% range, which is among the highest interest rates associated with consumer debt. Accordingly, ensuring one pays off one’s credit card debt is always important.
However, the APY range used by credit card companies is likely to see a boost following this Fed rate hike decision. That means that failing to pay the full balance on your credit card bill every month is going to result in even more interest owed.
Expectations are that credit card APYs could go from an average of around 16% today to around 18% as a result of this rate hike. Accordingly, investors with credit card debt may want to prioritize paying off their cards just a little bit faster.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
