How Does The Federal Reserve Raising Rates Affect My Credit Cards?
You heard that the Federal Reserve raised interest rates. How does the Fed increasing interest rates affect your credit cards personally? It’s actually pretty easy to tell.
First off, your credit cards are most likely tied to something called the prime rate, not the federal funds rate. The rate the Federal reserve raises is the rate the Fed charges banks for overnight loans. The prime rate is the interest rate that banks charge their most valuable (wealthy) customers. The prime rate moves in step with the Fed Funds rate.
Before the Fed raised rates, the fed fund rate was 0% (technically 0% – 0.25%), now it is 0.25% (technically 0.25% to 0.50%). The prime rate was 3.25% and now it is 3.50%.
How do rising interest rates affect your credit cards?
Simple. Your credit card interest rate is the prime rate plus another amount. The other amount is made up by the credit card issuer and you agreed to it when you signed the credit card application. Finding out how much your interest rate is, is easy. Just check your statement or log on to your credit card’s website. If you want to know where that interest rate comes from, you need to check the terms and conditions, also known as the fine print.
Credit Card Interest Rates Rising
This is from the Chase website regarding its Chase Saphire Preferred credit card. Look up top at the pricing information (you have to click past all of the big font, high-color, sales copy to get here). You see 15.99% to 22.99% and the words, “these APRs will vary with the market based on the Prime Rate“
If you want more details, you have to read the fine print of the fine print. You see that little ‘a’ superscript? It’s like an asterix and it corresponds to the little a at the bottom as a footnote. It says, “We add 12.74% to 19.74% to the Prime Rate to determine the Purchase Rate…” Note at the end the maximum APR is 29.99%. (Yikes!)
So, the interest rate on your credit card just went up 0.25% because the Prime Rate went up 0.25% because the Fed Funds rate went up 0.25%. Other loans will also be affected, although not all of them will be one-for-one like this.
If you are wondering about home mortgages, that is a different kettle of fish. While most home equity lines and home equity loans are also tied to the Prime Rate, first mortgages are generally tied to the 10-year Treasury Bond rate. Unlike the Fed Funds rate, Prime Rate, and your credit card’s interest rate, the 10-Year Treasury Bond’s interest rate is set by the market. Those rates have been rising for some time now in anticipation of today’s move by the Fed, so while mortgage rates will likely trend up from here, they may not increase by exactly 0.25%.