Author: Shiloh Edeh
Carrying a balance will now cost you more as average credit card interest rates (APR) reach their highest level in 37 years. According to a Bankrate survey, the average credit card APR reached 19.04% in the second week of November. The interest rate has risen by 2.74% points since the beginning of the year, the highest year-to-date increase.
Continue reading to learn why interest rates are at an all-time high and what you can do to protect yourself.
Why Are the Credit Card Interest Rates so High?
The last recorded increase in credit card APR within a single year occurred in 2010, when the CARD Act went into effect, resulting in changes in how credit card rates were set.
The latest high rates correspond with the Federal Reserve increasing its primary federal fund rates by 375 basis points since March to combat one of the highest inflation rates in four decades. The central bank hopes that making it more difficult for people to borrow money will slow the economy and relieve inflationary pressures.
The prime rate, or the interest rate that banks charge their most creditworthy clients, is currently 7%, and it rises as the federal funds rate rises. The prime rate and lending margin a bank offers to particular clients ultimately determine a credit card’s annual percentage rate (APR).
What Does This New Credit Card APR Mean for you?
Earlier this year, the credit card interest rate was 16.3%; now, it is 19.04%. If you carry a $5000 credit card balance and only make the minimum monthly payment at the previous 16.3% interest rate, you’ll pay about $5,517 in interest over 15 years. However, at today’s interest rate, it will cost you approximately $6,546.
As a result, it’s safe to say that carrying debt will cost you more with this new rate. According to Bankrate’s senior analyst Ted Rossman, minimum payments are a trap. He also stated that you must prioritize payments if you have credit card debt with an interest rate of nearly 20%.
What you can Do
Signing up for a 0% balance transfer card is one way to reduce your credit card balances quickly. This way, you can transfer your existing high-interest credit card debt to a new card with a 0% promotional rate that lasts up to two years.
However, there is a transfer fee of 3-5%. The best part of this strategy is that the interest-free period will allow you to pay down your credit card balance.
Another suggestion is to set up automatic monthly payments from your bank account and to pay more than the minimum. This will help you gain control of your debt and make it easier to manage.
You could also contact a credit counselor who can assist you in negotiating with your credit card company to get a discount on the new interest rates. However, you will have to pay for this service.
The Bottom Line
For the first time in over three decades, credit card interest rates have reached a record high of 19.04%. This new interest rate will make carrying debt even more expensive, so you must devise new strategies to help keep your credit card debt under control.