How is rising interest rate going to hike my credit card balance?
May 2, 2023, 6:00 PM
SALT LAKE CITY — The Federal Reserve is expected to raise the interest rate a quarter-point this week, marking the 10th time in a little over a year. Here is the history: Fed Rate Hikes 2022-2023. Incomes have not kept pace with inflation and so more people lean on their credit card.
The previous nine rate hikes have added $33.4 billion to annual credit card interest charges.
Dave and Dujanovic break down how much more it costs you today than just a few years ago.
Utahns carry less credit card debt than US average
According to CNBC:
- Which state carries the most debt? Alaskans take the top spot with an average credit card balance of $8,026.
- Which state carries the least? Iowans have the lowest balance at $4,774.
- Utahns on average have $5,600 in credit card debt — a bit lower than the national average of $6,194.
“Forbes boiled it down like this. The increase in the interest rate, per the Fed, is creating 16% higher credit-card debt just in Utah,” Debbie pointed out.
If the balance on your credit card is $2,000, the Fed’s rate hikes in 2022 and 2023 have added $320 to your balance.
The average interest rate in 2020 on all credit card accounts was 14.65% as reported by ValuePenguin.
On May 1, 2023, the average credit card interest rate was 24.25%, according to Forbes.
A small interest rate rise but a big increase in debt
“Let’s pretend you are carrying a $5,200 balance on your credit,” Debbie said.
It’s back in 2020 and your credit card has an average annual interest rate of 15%. It will take 3 years and 10 months to pay off the $5,200 balance, with a total interest cost of $1,658.
Take the same balance of $5,200 at $150 per month on a card with today’s rate of 21%. It would take 4 years and 6 months to pay off the balance, with a total interest of $2,868. So it would take 8 months longer and cost $1,210 more in interest.
“OK, just to put that in perspective, you’re paying half the original bill in interest,” Dave said. “It’s only 6 percentage points. You’re only jumping up from 15 to 21 [%] and it doubles what you’re going to pay in interest.”
“Only is a big deal,” Debbie said. “Only 6% is a really, big deal and what is costing you out of pocket.”
Lower your personal debt
Back in February, when the Fed hiked the interest rate from 4.50% to 4.75%, Dave and Debbie spoke with Greg McBride, chief financial analyst at Bankrate, about what you can do to lower your personal debt:
Interest rate ticks up. Time to tame your debt.
Related:
Europe’s inflation inches up ahead of interest rate decision
Dave & Dujanovic can be heard on weekdays from 9 a.m. to noon. on KSL NewsRadio. Users can find the show on the KSL NewsRadio website and app, as well as Apple Podcasts and Google Play.
