The long-anticipated move by the Federal Reserve to raise its benchmark interest rate this week could have the biggest — and quickest — impact on credit card borrowers, especially those carrying large balances.

Fed Rate Hike Could Hit Credit Credit Holders With Big Balances the Hardest

Fed Rate Hike Could Hit Credit Credit Holders With Big Balances the Hardest

The long-anticipated move by the Federal Reserve to raise its benchmark interest rate this week could have the biggest — and quickest — impact on credit card borrowers, especially those carrying large balances.

Big-ticket financial products such as fixed-rate mortgages and car loans won’t change much in the short- to medium-term. But credit cards are most susceptible to changes in the federal funds rate, which has been “near zero,” or in a range of 0 to 0.25 percent, since December 2008 in order to stimulate growth during the financial crisis and Great Recession.

It is widely expected that the Fed will only raise the benchmark by 25 basis points, or to a range of .25 to .50 percent.

Many credit card rates — as well as adjustable-rate mortgages and home equity lines of credit, are pegged to the prime rate. And the prime rate moves with the federal funds rate. Prime is 3.25 percent today, and many credit card issuers add a certain percent on top of the prime to set the annual percentage rate, or APR.

For those borrowers who keep credit card balances low, or even better, pay them off regularly, a 0.25 percent increase in an APR is not a big issue. But for those who carry a balance month to month, the higher rate affects the full balance, including new purchases.

The Consumer Financial Protection Bureau projects in a recent report that a quarter-point jump in the federal funds rate would cost credit card borrowers with ongoing balances $1 billion annually, and a full percentage-point hike almost $6 billion.

Since its been nine years since the Fed has raised rates, and the federal funds rate has been near zero for seven years, many credit card holders may be caught off-guard in coming months.

The CFPB: “Consumers may have come to expect that their existing balances, in general, will not be repriced. But if the effective federal funds rate, and therefore the Prime Rate, increases, revolving consumers will be exposed to significant cost increases on their existing balances.”

 

 

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