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After months of relief from rising prices, inflation is continuing to creep back up, and many Americans are seeing an impact on more than just their grocery bills. According to the latest Consumer Price Index (CPI) data, released this week, inflation rose 2.7% annually in June, slightly above expectations and the highest reading since February. Food prices are leading the charge, with higher prices on staples like eggs, which are up a staggering 27% on an annual basis.
While the monthly increase in prices may seem modest at 0.3%, this uptick in inflation is the largest to occur since January, and it suggests that the inflationary pressures that persisted throughout much of last year are not fully behind us. But while inflation drives up the cost of consumer goods, it also has a wider impact on the economy. For example, inflation plays a big role in the Federal Reserve’s interest rate decisions, and in turn, it also impacts the wider rate environment and the cost of borrowing.
For now, economists and investors overwhelmingly expect the Fed to hold rates steady at its July 29-30 meeting. This decision – and the broader economic environment driving it – could, in turn, have significant implications for anyone carrying credit card debt.
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What could happen to credit card rates now that inflation is climbing again?
While credit card interest rates are not directly dictated by the Federal Reserve, they are closely tied to the federal funds rate. When inflation rises, as we’re seeing now, the Federal Reserve typically responds by keeping interest rates high to cool down economic activity and bring prices under control.
This creates a ripple effect that eventually reaches your credit card statement, as most credit cards carry variable interest rates that are directly linked to the prime rate, which moves in lockstep with the Fed’s benchmark rate. So, when the Fed raises or cuts rates, credit card APRs often move in a similar direction shortly thereafter. And, with the Fed’s target range currently sitting at 4.25% to 4.5%, the average credit card rate has already surged past 21%.
Should inflation continue to rise, the Fed may need to keep rates higher for longer or even consider another hike later this year to cool the economy further. If that happens, credit card rates are likely to either stay at their current elevated levels or climb even higher. For cardholders carrying balances, this would translate to more of each payment going toward interest rather than principal, making it harder to pay down debt.
It’s important to note, though, that higher inflation doesn’t automatically mean higher credit card rates overnight. There are a lot of other factors that play a role in the rates card issuers set. But it does make it more likely that rates will stay high or climb further if the Fed decides to tighten monetary policy again.
Should card rates climb, though, it could have a big impact on the Americans who have accumulated credit card debt during this period of economic uncertainty and high living costs. With everyday expenses like food and housing already straining budgets, higher credit card rates would add another layer of financial pressure, so if you’re already struggling to pay your card balances, it’s important to find a solution sooner rather than later.
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What options do you have for lowering your credit card rates now?
The good news is that there are several strategies you can use to reduce your credit card costs, even in today’s challenging rate environment:
- Call your credit card company directly. Many issuers will offer lower rates to customers in good standing who ask for extra help, especially if you mention competing offers or financial hardship.
- Transfer balances to a 0% APR card. Moving your balances to a new card with a 0% promotional rate can cut out interest completely for a certain period, so you may want to look for promotional balance transfer offers that can give you 12 to 21 months of interest-free payments.
- Consider consolidating with a personal loan. The average personal loan has a rate of just under 13% currently, so consolidating your credit card debt with this type of loan could help you save significantly on the interest charges.
- Enroll in a hardship program. If you’re struggling, contact your card issuer to discuss any hardship programs or modified payment arrangements available to you. If you qualify to enroll, a hardship program could dramatically reduce your interest rate or temporarily remove interest from the equation.
- Work with a credit counseling agency. One of the big benefits of credit counseling is that the counselor you work with can help you create a debt management plan, which could result in lower credit card rates and combine your payments into one monthly bill.
The bottom line
Rising inflation creates a challenging environment for credit card users, as it puts upward pressure on interest rates across the board. While the Fed’s commitment to fighting inflation is necessary for long-term economic stability, it means credit card rates are likely to remain elevated in the near term. The best defense against high rates is to be proactive – whether that means negotiating with your current issuer, exploring balance transfer options, or simply paying down balances more aggressively. In an environment where borrowing costs are high and everyday expenses are rising, taking control of your credit card debt becomes even more crucial for maintaining financial stability.
