NEW YORK (AP) — The Federal Reserve raised its key rate by another quarter point Wednesday, bringing it to the highest level in 15 years as part of an ongoing effort to ease inflation by making borrowing more expensive.
If you have money to save, you’ll probably earn a bit more interest on it, but the increase will make it even costlier to borrow for homes, autos and other purchases. The interest rate increase comes at a time when credit card debt is at record levels.
Here’s what the increase means for your credit card bill and what you can do if you’re carrying debt:
HOW DOES THE FED DECISION AFFECT CREDIT CARD DEBT?
The Federal Reserve doesn’t directly dictate how much interest you pay on your credit card debt. But the Fed’s rate is the basis for your bank’s “prime rate.” In combination with other factors, such as your credit score, the prime rate helps determine the Annual Percentage Rate, or APR, on your credit card.
The latest increase will likely raise the APR on your credit card 0.25%. So, if you have a 20.4% rate, which is the average according to Bankrate, it might increase to 20.65%.
If you don’t carry a balance from month to month, the APR is less important.
But if, for example, you have a $4,000 credit balance and your interest rate is 20%, if you only make a fixed payment of $110 per month, it would take you a bit under five years to pay off your credit card debt and you would pay approximately $2,200 in interest.
If your APR increases by a percentage point, paying off your balance would take two months longer and cost an additional $215.