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Rising interest rates, credit card debt a ‘double whammy’: Economist

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To cope with rising prices, many Americans are once again falling back on their credit cards.

Credit card balances grew year over year, reaching $841 billion in the first three months of 2022, according to the most recent data from the Federal Reserve Bank of New York.

At this rate, sales could soon reach record highs amid rising prices for gas, groceries and housing, among other necessities, according to Ted Rossman, senior industry analyst at CreditCards.com.

Learn more about personal finance:
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Workers could see the biggest increases since the Great Recession next year

For its part, the Federal Reserve raised its target federal funds rate in an effort to calm runaway inflation.

However, anyone with a balance will also see the annual percentage rate on their credit card head higher as the Fed continues to raise rates to try to rein in rising prices.

Beware of inflation and the “double whammy” of credit

“Rates are rising and consumers are running out of options for cheap credit,” said Nela Richardson, chief economist at payroll processor ADP.

As people spend their savings and turn to credit for purchases, they’re also being hit by higher interest rates as Fed policymakers try to rein in inflation — what it calls a ” double whammy”.

“That means consumers aren’t just shopping at today’s inflated prices, they’re still paying more and more to cover the rising cost of borrowing.”

Since most credit cards have a variable rate, there is a direct link to the Fed’s benchmark index. As the federal funds rate rises, so does the prime rate, and credit card rates follow. Cardholders typically see the impact within a billing cycle or two.

The annual percentages are currently 17.13% on average, but could be closer to 19% by the end of the year, which would be an all-time high, according to Rossman.

To date, the record is 17.87%set in April 2019, according to Bankrate.com.

How to Avoid Record Credit Card Interest Rates

Gina McKague, founder of McKague Financial in Livonia, Michigan, offers these tips for lowering your credit card interest rate and staying in control of your payments:

  • Build a healthy credit rating. Having a higher credit score proves to lenders that you are able to repay loans, which, in turn, can usually give you a lower credit card interest rate.
  • Shop around and negotiate for the best rate. Shop around with different credit card companies and find out which one will give you the lowest rate. Not all creditors will start with the same offer, but you can negotiate. Lenders often match rates to win a client.
  • Review your credit cards annually. Each year, take the time to assess the interest rate you are being charged. If you’ve been a good paying customer, ask the creditor to lower your rate.
  • Take advantage of new offers. If you carry a balance each month and charge interest, consider rolling it over to a card that offers 0% interest. Just make sure to pay the balance before the offer expires.
  • Pay your bill at the end of each month. If you pay your bill in full each billing period, you avoid paying interest and you don’t have to worry about it.

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