How is rising interest rate going to hike my credit card balance?
May 2, 2023, 6:00 PM
File - Credit card logos are displayed on a business's door, Monday, July 5, 2021, in Cambridge, Mass. As the Federal Reserve considers whether to raise interest rates again, credit card debt is already at record highs, and more people are carrying debt month to month. (AP Photo/Steven Senne, File)
Credit: ASSOCIATED PRESS
(AP Photo/Steven Senne, File)
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.
