The Federal Reserve’s decision to pause raising its benchmark interest rate is no pause for the anxiety of Americans eyeing ballooning credit-card bills.
While it may halt the rise of many credit-card rates for now, the rates for some cards might still rise as some issuers pass on the previous Fed rate hikes, credit-card industry watchers say.
“The high credit-card interest rates consumers are currently seeing are going nowhere anytime soon,” said Michele Raneri, TransUnion’s TRU, +0.09% vice president and head of U.S. research and consulting. People carrying month-to-month debt have an average balance of $ 5,800, she said.
Even if the Fed rate decision prompts a pause on rising credit-card annual percentage rates, Americans must still grapple with all of that interest-bearing debt.
Households had $ 986 billion in credit-card debt through the first quarter of 2023, according to the Federal Reserve Bank of New York. That’s up 17% from $ 841 billion over the same period last year.
People carrying a card balance month-to-month averaged 20.92% APRs in the first quarter of the year, up from 16.17% at the same last year, according to Fed data.
“On Wednesday, the Federal Reserve said it would hold off on another increase to its key interest rate after 10 consecutive rate increases, which began in March 2022.”
“These rates are so high, that even a pause is not a get-out-of-jail-free card, or a breath of fresh air,” said Ted Rossman, Bankrate’s senior industry analyst.
On Wednesday, the Fed said it would hold off on another increase to its key interest rate — for now — after 10 straight increases, which began in March 2022.
The federal funds rate sits at a target range of 5% to 5.25%, up from near zero at the start of the rate-hiking cycle.
The APRs used by credit-card issuers are closely tied to the Fed’s interest rate, and their recent climb shows the effects of the central bank’s fast, steep rate hikes to fight inflation.
In recent years, the federal fund rate moves have been the “primary driver” behind credit-card APRs going lower and higher, according to Matt Schulz, chief credit analyst at LendingTree.
LendingTree’s data showed the national average on new card offers was 23.98% in May, up from 19.62% in March 2022.
It’s possible APRs can pause with a Fed pause, he said. But it might take one or two billing cycles — one or two months — for some cards to reflect the most recent rates, Rossman and Schulz both said.
He added a caveat. “Even though the Fed’s rate pause is good news for folks with credit-card debt, it doesn’t necessarily mean that credit-card interest rates are going to immediately stop rising,” Schulz said.
“‘Even though the Fed’s rate pause is good news for folks with credit-card debt, it doesn’t necessarily mean that credit-card interest rates are going to immediately stop rising.’”
Many of the biggest card issuers “have already baked in all of the rate hikes,” he noted. “But there are a lot of card issuers out there, and they move on different timelines.”
Bill Hardekopf, CEO of the personal finance website BillSaver.com, doubts rising APRs are still absorbing past rate hikes. “Any rate increases that credit-card issuers take right now are probably due to competitive situations or a profitability situation rather than a lag effect,” he said.
Even if some APRs continue to rise, it’s unlikely they will fall anytime soon.
Due to all the interest rate increases over the last year, the average cardholder has paid an extra $ 290 annually on their credit-card balances, according to estimates from TransUnion TRU, +0.09%, one of the country’s three major credit-reporting companies, along with Experian EXPGY, +0.24% and Equifax EFX, -1.32%.
It remains to be seen if future Fed hikes are coming. Wednesday’s interest rate announcement penciled in the possibility of another 50-basis-point hike if inflation rates do not fall at a faster pace. (A basis point is 1/100th of a percentage point.)
The Fed didn’t specify when it might move, but a hike as soon as the next meeting in July is possible.
But what if credit-card issuers are not finished increasing their rates — even after the Fed is done hiking its own interest rate?
It may be small consolation, but people will at least get notice of any imminent increases.
Credit-card issuers need to give customers 45-day advance notice before raising interest rates, under a law that took effect in 2010. One exception to the advance-notice rule is a rate increase that’s fueled by an increase in the federal funds rate, analysts said.
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