Will Rising Interest Rates Affect Your Credit Card?

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As inflation drives up everyday expenses, the Federal Reserve is increasing interest rates in an attempt to cool off the economy. The Fed raised its target federal funds rate by 0.75% in June 2022, the largest increase in nearly 30 years, and it may announce additional increases before the year ends.

Rising interest rates can affect your finances in various ways, and here's what you need to know if you have a credit card.

Your credit card's rate may increase

Most credit cards have a variable interest rate, which means your card's annual percentage rate (APR) can change over time. Many cards' rates depend on a benchmark rate, such as the prime rate, and the benchmarks are often correlated with the federal funds rate. As a result, when the Fed increases its interest rate target, your credit card's APR may increase as well.

Card issuers generally have to give you at least 45 days notice if they want to increase your APR for new purchases. And they can't increase your APR on existing balances unless there's a special exemption, such as when your payment is 60 days past due. However, a changing benchmark rate is an exception, which means your rate for new and current balances could automatically increase if your card has a variable rate.

The rate changes could also significantly impact how much interest accrues on your card, and lead to a larger minimum payment. According to data from Experian, the average credit card debt balance was $5,221 in 2021. If you have that balance and your card's APR increases by 0.75%, you'll accrue over $10 more in interest every day.

What can you do if your card's interest rate rises?

While you might not have a say in whether your card issuer increases your card's interest rate, you can take steps to limit the impact of a rate change.

If you can pay your credit card bills in full every month, you generally don't have to pay any interest on new purchases. And don't worry, the myth that carrying a credit card balance will help your FICO® Score isn't true—you can save money by paying off your balance in full and have an excellent FICO Score.

But that's not always realistic, and if you're working to pay down a credit card balance you could look into these alternatives:

Consider a balance transfer card. Some credit cards will give you a low or 0% APR on balances that you transfer to the card. These promotional offers may only be available to new cardholders, and you might have to pay a balance-transfer fee on the amount you move. Still, if you can save more than you pay in fees, you might come out ahead and be able to pay off your balance during the 0% APR promotional period.
Take out a fixed-rate consolidation loan. Another option could be to take out a personal loan with a fixed interest rate and use the funds to pay off your credit cards. The loan's interest rate and monthly payment won't change, and you'll have a clear timeline for when you pay off the debt. However, be careful about using your cards and winding up back in credit card debt after taking out the loan.
Ask for a lower interest rate. After an automatic rate increase, you could try asking your card issuer to bring your rate back down. You may have better chances if you've been a customer for a long time or your FICO® Score or income have increased since you opened the card. If the card issuer doesn't agree to a permanent change, you could also ask the representative if there are any temporary assistance options available.

Creating and using a budgeting system can also be helpful when paying down debts and trying to avoid overspending. While budgeting won't impact your interest rates, paying down balances quickly can save you money overall.

Improve your credit to qualify for lower rates

Your FICO® Score can impact the interest rate you receive on a new credit card or loan, and the promotional interest rate offers you get on your current credit cards. Even if you can't control when interest rates change, you can take steps to improve your FICO Score. For many people, paying down credit card balances and making on-time payments on credit cards and loans can be important steps to getting and keeping a good FICO Score.

Louis DeNicola

Louis DeNicola is a finance writer based in Oakland, California. He specializes in consumer credit, personal finance, and small business finance, and loves helping people find ways to save money. In addition to FICO, Louis works with a variety of financial services firms, credit bureaus, and educational websites, including LendingTree, Credit Karma, and Experian.