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How Government Interest Rates Affect Credit Cards: What You Must Know

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According to The New York Times, government interest rates will be raised above zero by the Federal Reserve or the ‘Fed’ as it is endearingly referred to, for the first time since 2008 this coming September. The Fed’s plan to increase government interest rates will initially be quite moderate, as their goal is to protect the small of amount of economic growth that ensued over the winter months, but it’s time to face the music. Those days of ‘easy money’ like anything else, must come to end and while this transition will certainly impact numerous financial arenas, how will raising government interest rates affect credit cards? The steps to determine what is in store for the future are examining prime rates, the behavior of the Fed and what ultimately occurs. So, shall we?

Government Interest Rates and Credit Cards

The Relationship Between Prime Rates and Credit Cards

After scrutinizing the fine print on a credit card’s contract, it leaps off the page an account’s interest rate is variable and solely dependent upon the prime rate. The prime rate is a standard released by The Wall Street Journal and is referred to as “the base rate on corporate loans posted by at least 70 percent of the 10 largest banks in the United States.” In recent years, it has remained at a stalwart 3.25 percent.

A credit card’s variable rate is an increase above the prime rate. How this is calculated depends upon such circumstances as credit rating and the classification of the card itself. To depict exactly what this means, if a person has fabulous credit and a credit card where its rate is quite low, the interest that will be paid on the balance would be 8 percent in addition to the prime rate, so it would be 11.25 percent. Therefore, if the prime rate rises which is related to government interest rates, than the variable rate on credit cards follows in their footsteps.

How The Fed Figures in Government Interest Rates

Although the Federal Reserve is the big boy on the block, the agency is not responsible for establishing the prime rate. What it is accountable for, among other things, is to regulate how and when banking institutions swap funds to balance their accounts. If the Fed decides to increase federal funds rates, then the prime rate, which is directly linked also increases and subsequently the annual percentage rate on credit card balances. Also, bear in mind that government rate increases are not protected under the credit card legislation from 2009 that shields consumers from contending with automatic and immediate rate increases. Government rate increases do not have to be announced 45 days prior to their inception.

What Does a Government Rate Increase Really Mean?

Thankfully, not so very much. When the government rate increases in September and in the future it will be by very small increments, so the annual percentage rate on credit cards will follow suit. For instance, if the federal funds rate is expanded by half a percentage point, the prime rate would do the same and so would the annual percentage rate, but the government rate increase would only result in a credit card bill that would only be at most several dollars higher.

 

 

 

 

 

 

 

 

 

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