As many consumers turn to credit cards this holiday season to fund gifts, vacations and dinners out- a Federal rate hike could be the essential “anti-holiday” gift. The annual percentage rate is expected to increase on most credit cards and if it does, it will affect many card holders on their next bill.
That’s because the hook for most variable-rate consumer borrowing, whether credit cards, adjustable-rate mortgages, or home equity lines of credit, is the prime rate. And that rate moves with the federal funds rate. Today, prime is 3.25 percent, and card issuers add a certain percent on top of it to set the annual percentage rate (APR).
This is a non-issue for consumers who pay off their balances. However, for those who carry a balance month-to-month, it will affect the entire balance, not just new purchases. If this turns into a series of rate hikes, it could make paying off a big balance take longer and cost more.
In a recent report, a quarter point-rise in the federal funds rate would cost cardholders $1 billion annually, and a full percentage-point hike almost $6 billion, according to the Consumer Financial Protection Bureau.
The good news? In most cases, if you got a promotional rate on a balance transfer, that rate is fixed. So anyone who has taken advantage of such offers would not see their transferred balance affected by rate increases until the promotional period ends.
If you are carrying a large balance on a card with a double-digit APR, there are still opportunities to transfer balances at a zero percent rate, fixed, for a year or more.
Consumers are advised to call their credit card company to see if they qualify for a lower rate. But make sure your credit is the same or better than it has been in the past. If issuers find your financial situation has changed for the worse when they check your record, they can cut your credit limit, or even decide they do not want you as a customer anymore.
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