How much could your credit card APR rise after the Fed rate hike?

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The Federal Reserve has increased rates for the first time in three years, which could make carrying credit card debt more expensive.

During the Federal Open Market Committee (FOMC) session on Sept. 16, the Fed lowered its target federal funds rate range by 25 basis points (a quarter percentage point). That brings the current target to 3.75%-4.00% and marks the first Fed rate hike since July 2023.

Even without the Fed increasing rates, the cost of credit card debt has remained high for American borrowers in recent years:

Average credit card interest rates increased from around 16% in 2022 to over 21% in 2024. Today, they still hover just below 21%.

Credit card debt balances have been on a steady incline since 2021. Total credit card balances in the U.S. surpassed $1 trillion for the first time in 2023 and today sit around $1.26 trillion.

Between 2022 and 2026, credit card balances that are delinquent by 90 or more days increased from 7.6% to 12.8%.

Rising federal interest rates could signal higher costs for Americans with credit card balances. But there are still several factors that influence your credit card's interest rate. The most important thing you can do is begin paying down debt now.

What does a higher federal funds rate mean for your credit cards?

Many credit cards have variable APRs, which means they change over time. While APRs don't directly follow federal interest rate movements, they do tend to move alongside Fed rate hikes and cuts.

Take 2022, for example, when the Fed increased the federal funds rate from pandemic-era lows in response to high inflation. Between the March 2022 and December 2022 FOMC meetings, the federal funds target range increased from 0.25%-0.50% to 4.25%-4.50%. That's an increase of 400 basis points.

At the same time, average credit card rates increased significantly. In February 2022, before the rate hikes started, the average credit card interest rate was 14.56%. By November 2022, it had increased to 19.07%. After four more rate hikes in 2023, the average credit card interest rate by the end of that year was 21.47%.

As it did then, the Fed's latest rate hike — and any future interest rate increases that follow — is likely to also increase credit card rates for borrowers.

In addition to higher rates, the large gap between the banking industry's benchmark rate, the so-called prime rate at which banks lend to their best customers, and the rates credit card companies charge is another factor keeping your credit card APR high regardless of the Fed's decisions.

That APR margin also grew as interest rates increased throughout 2022 and 2023 — and in February of 2024, APR margins hit an all-time high .

How to deal with a higher federal funds rate

You can always find your current APR through your online account or on your monthly credit card statement. If you do see your credit card APR increase, one action you can take is to ask your card issuer for a lower APR. While there's no guarantee you'll get a lower rate, you may have a better chance if you've improved your credit score or increased your income since you applied for the card.

But one thing that Fed rate hikes make clear is the high cost of carrying a credit card balance.

Don't wait for relief from the Fed . Start making moves today that can help you clear your credit card debt faster and avoid high-interest balances in the future.

Don't wait to get ahead of your credit card debt. These are some options to consider today:

You may qualify for a balance transfer credit card if you have a solid credit score. These cards carry an introductory 0% APR on your transferred balances. Today, intro periods typically range from 12 to 21 months.

When you transfer your balance to the new card, you should be prepared to pay a balance transfer fee. These fees can set you back around 3% to 5% of your total balance. On a balance of $5,000, that could be as much as $250. Don't let that dissuade you from a balance transfer, though — the fee is still much less than the thousands you could otherwise pay in interest.

Here are a few of the best balance transfer credit cards available today. Some even offer rewards you can continue to earn after you pay down your debt.

Introductory APR 0% intro APR on purchases and balance transfers for 15 months, then variable 18.49% - 28.49% APR

Introductory Balance Transfer APR 0% Intro APR on Balance Transfers for 15 months

Introductory APR 0% intro APR on balance transfers for the first 18 months (variable APR applies after that)

If you're only making minimum payments toward your credit card balances, now is the time to start putting as much as you can toward paying down your debt. Minimum payments can leave you with mounting debt balances for years and no end in sight. Even if you can only pay a few dollars more than the minimum each month, you'll start to chip away at the debt more quickly.

Say you have a $5,000 balance on a card with a 21% APR. With minimum payments (calculated as 1% of the balance plus accrued interest), it could take you more than 23 years to pay the balance in full. If, instead, you could dedicate $200 toward the debt each month, you could pay it off in a much more manageable 37 months.

Try implementing debt payoff strategies like the snowball or avalanche method, or focus on making multiple monthly payments if it helps you get ahead of your minimum.

It may be the most obvious move, but one of the toughest to implement: If you're working on paying down debt, try not to spend more on your card and increase your balances.

You might forfeit some rewards value from the points and miles you would otherwise earn, but it can be a good idea to switch to a debit card or cash if you have a tendency to overspend using credit. Those rewards are not worth nearly as much as you'll spend paying down interest charges and balances you can't afford.

If you're really struggling with long-term debt that never seems to go down, you may want to look into credit counseling. A credit counselor can help you develop a realistic budget for your spending, manage existing debts, or even develop a debt management plan. This can be especially useful if you don't have the great credit score required to take advantage of tools like a 0% APR card .

To get started, you can learn more about credit counseling through the Consumer Financial Protection Bureau , or look into nonprofit credit counseling organizations like the National Foundation for Credit Counseling or the Financial Counseling Association of America .

Editorial Disclosure: The information in this article has not been reviewed or approved by any advertiser. All opinions belong solely to Yahoo Finance and are not those of any other entity. The details on financial products, including card rates and fees, are accurate as of the publish date. All products or services are presented without warranty. Check the bank's website for the most current information. This site doesn't include all currently available offers. Credit score alone does not guarantee or imply approval for any financial product.

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