Carry credit card debt? Fed rate hikes may hurt

For roughly a decade, millions of consumers could afford to focus on the rewards and ignore the rates on their credit cards.

“They haven’t really had to think too much about interest rates because they didn’t change that much,” said Robert Dye, chief economist at Comerica Bank.

Those days are over. Get ready for higher rates on your credit cards after more rounds of Fed rate hikes this year and next. Consumers might not realize it, but the interest rates on credit cards aren’t fixed. Most credit cards have what are called “variable rates.”

As a result, the interest rate consumers pay on credit card debt typically ticks up each time the Federal Reserve raises rates.

This month, the Fed raised rates by a quarter-point. The target range for the federal funds rate will be 1.75 percent to 2 percent. A rate hike by the Fed translates into a higher prime rate.

As a result, consumers can expect higher rates on credit cards, home equity lines of credit and other adjustable-rate loans.

“Consumers will need to be more savvy about their spending and how they finance it as a result of rising interest rates,” Dye said.

If you don’t pay off your credit card every month, you’re looking at slightly higher monthly minimums and a higher annual percentage rate on the credit card balance.

In many cases, higher interest rates can hit in the first billing period after a change in the prime rate. Bank policies vary; some can change quarterly.

“When the Fed raises rates, the APR on your credit card is going to rise pretty quickly,” said Matt Schulz, senior industry analyst for CreditCards. com.

The price tag for the latest Fed rate hike will be an extra $1.6 billion this year alone for consumers who are carrying debt on their credit cards, according to an analysis by WalletHub.

And that’s the added cost of just one rate hike. Many economists expect two more rate hikes in 2018. And many are forecasting three more rate hikes in 2019.

Consumers began the year with more than $1 trillion charged on their credit cards for the first time ever. But consumers did repay $40.3 billion in credit card debt during the first quarter — the second biggest quarterly payout ever, according to Jill Gonzalez, analyst for WalletHub.com.

Many times, consumers use their tax refund cash or a yearend bonus to pay down debt in the beginning of the year, she said. But this year, consumers appeared to act more aggressively to tackle their debt.

“People are realizing they’re not keeping up with their bills. They’re falling behind,” Gonzalez said.

About 41.2 percent of all households carry some credit card debt, according to a recent study by ValuePenguin, a consumer data website. Researchers found the median debt per American household to be $2,300, while the average debt stands at $5,700 based on the most recent data from the Survey of Consumer Finances by the U.S. Federal Reserve. This information comes from data collected up through 2013.

The average credit card debt for those younger than 35 was $5,808, but credit card debt goes up significantly for other age groups, according to the study.

Consumers age 35 to 44 had an average credit card debt of $8,235. Consumers age 45 to 54 had an average credit card debt of $9,096.