Here’s How Much a Fed Rate Hike Will Affect Credit Card Debt Over Time
The Federal Reserve is meeting today to decide if it will finally raise rates. If so, it can directly affect the rates on short-term loans, namely, your credit cards. But as NerdWallet points out, the difference won’t be huge.
Even if the Fed raises the federal funds rate today, it is expected to only rise in 0.25% increments, so this change will not happen overnight. However, many experts say that the rate hike will indirectly affect rates on mortgages, student loans and other rates, but since it is actually pegged to the short-term market rate, it will have a more direct effect on credit cards. Don’t worry, because as Sean McQuay, NerdWallet’s credit card expert explains:
Credit cards are a prominent category in which we can expect interest rate hikes, but we estimate the impact will be relatively small. NerdWallet did the math and found that the average American family in debt could expect to spend an additional $ 125 in credit card interest over the next five years. While this is still real money, it shouldn’t significantly affect your financial situation.
Of course, this is for the average household, so it might be a different story if you have a lot of debt. Either way, you want to focus on paying off, and a higher interest rate will add motivation to this .
NerdWallet quantified the change in the infographic below, which shows how much more the average debtor can expect to pay when the rate increases by 0.25%. The chart assumes interest based on a $ 15,355 credit card balance, the US average . They also assume that starting at a variable annual interest rate of 18%.
Of course, the Fed is likely to raise rates again in the course of this projected debt repayment. In fact, they expect them to increase it by a full percentage over the next few years. But NerdWallet’s calculations are simply meant to quantify change, a quarter of a percent at a time.
Take a look at the numbers below and you’ll want to look at the “rise from a Fed hike,” which shows how much more you pay over time.