Credit Card Balances Are Rising—and So Are Interest Rates

Take steps now to protect yourself from paying more in interest

By Penelope Wang

Inflation is producing a double-whammy for many credit card users. Not only are monthly balances rising (because everything is more expensive), the interest rate you pay on that debt is going up, too.

Americans’ total credit card balances jumped 13 percent in the second quarter of 2022 from a year earlier, according to the New York Federal Reserve. That’s the largest year-over-year increase since 2003.

Meanwhile, the average rate for new credit cards recently hit 21.4 percent. And that rate is likely to keep rising as the Federal Reserve pushes up interest rates to fight inflation.

“Those are pretty scary numbers for folks, especially when you combine it with rampant inflation and more rate hikes,” says Matt Schulz, chief credit analyst at LendingTree. “Your current credit card debt is only going to get more and more expensive."

When the Fed raises rates, you are likely to see that reflected in your credit card rates within the next two billing cycles, says Schulz. You can expect your credit card rate to move up by the same amount as the Fed’s increase, which was 75 basis points (or three-quarters of a percentage point) in July. A similar hike is expected this month.

Those rising rates will have an especially sharp impact on the 4 out 10 borrowers who carry a balance (PDF) on their credit cards. Only about 35 percent of borrowers pay off their bills each month, according to the American Bankers Association. The remaining cards are considered dormant.

Credit Card Issuers Don't Have to Notify You When They Raise Interest Rates

It’s important to try and pay down your debt now, since you may not get a heads-up from your credit issuer that your interest rate is about to rise.

The 2009 Credit Card Act doesn’t require lenders to notify borrowers about rate increases due to a higher prime rate, which is the interest rate charged by banks. (The prime rate is based on the Fed’s rate.)

Paying off credit card debt may be a tough task for some consumers. The average credit card debt per household was nearly $9,000 in the first half of this year, according to Jill Gonzalez, analyst at WalletHub.

“Overall, a 75 basis point Fed rate hike will cost credit card users an additional $5.3 billion this year, on top of the increases that have already happened so far,” Gonzalez says.

Take Advantage of Your Options

Here are steps you can take now to limit the impact of higher interest rates:

Start paying down your balance. If you’re stuck carrying a balance from month to month, create a payoff plan that targets certain credit card bills first. Many financial planners suggest starting with your highest-rate debt, since that will save you the most money.

Still, some consumers prefer paying off the smallest balances first, since they can get more immediate satisfaction. Whichever plan you choose, make sure it happens by using autopay, so you won’t forget to move the money.

You can also try asking for a lower interest rate from your credit card issuer. A LendingTree survey found that 70 percent of requests for lower rates were granted.

And for those who are struggling to pay the bills, consider turning for help from a nonprofit credit counseling agency, which can work with you for little or no fee. You can find one through the National Foundation for Credit Counseling.

Opt for a balance transfer card. Another way to trim your debt is through a zero-percent balance transfer card, says Ted Rossman, senior industry analyst at Bankrate.com.

With this move, you can transfer your balance to a card that lets you pay zero interest for an extended period, sometimes as long as 21 months. That gives you time to pay down your debt. Some cards that recently offered this deal include the Wells Fargo Reflect and the Citi Diamond Preferred.

Zero balance transfer cards are still plentiful, a recent LendingTree survey found. But this option won’t work for everyone, since you typically need a good or excellent credit score—about 700 or higher—to qualify for an attractive balance transfer deal. You should also be confident that you can pay off your balance by the end of that period. Otherwise, you’ll end up paying more interest.

You will also incur a transfer fee of 3 percent to 5 percent of the amount you move. So be sure to weigh that cost with the benefits of zero interest over that period, says Rossman.

Pay careful attention to the credit card rate before signing up. Consumers who are searching for a new credit card should pay careful attention to the card’s interest rate, especially if they tend to carry balances. Many credit card companies are offering tempting sign-up bonuses and introductory APRs, but read through all the fine print before signing up.

“The most important thing to think about is how you are going to use it and what you want to get from it, because that’s really the only way to get the most out of the credit card,” Schulz says. Part of the discussion, he adds, is understanding whether you’re someone who will carry a balance. “If not, then the interest rate is less of an issue.”

Lay off the credit and use debit or cash. To make sure that you really whittle down your debt, use your credit card as sparingly as possible. Instead, pull out cash or use a debit card for your transactions, which may help you curb spending, research has found.

Once you have your debt under control, you can focus on your credit card strategically, taking advantage of rewards and discounts, and making sure to pay off their balance in full each month.

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