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Fed rate increase means higher credit card rates

Meanwhile, depositors areĀ out of luck

The Federal Reserve’s rate-setting committee voted to boost its benchmark federal funds target by 0.25 percent and banks responded by raising their prime rate, the index on which variable rate cards are based. The prime is now 3.5 percent, up from 3.25 percent.

Since enactment of the Credit CARD Act of 2009, cardholders have been protected from rate increases on their existing balances, with a few exceptions. One of law’s exceptions is variable-rate credit cards that are pegged to a market index such as the prime rate. Most cards have converted to the variable rate structure since the CARD Act was passed.

The Fed’s December interest rate increase hasn’t brought a similar increase in the interest banks pay to hold depositors’ money. If you’re a depositor with money in a checking or saving account, you’re still making little to nothing in interest.

In addition, lenders are increasing borrowing costs. A sreport from CardHub finds that the average financing for new credit cards was up 22 basis points (or 0.22 percentage points) in the fourth quarter as the Fed raised its baseline interest rate from a seven-year rock-bottom zero percent level. Such a rise in credit card rates mirrors central bank’s 25 basis point increase to the fed funds rate.

WalletHub projects this will cost consumer around $1.3 billion in extra credit card debt payments over the next year. (Perhaps another reason to remember to pay off that monthly balance). The window of super-low borrowing costs for businesses may also be closing. Many larger banks throughout the country raised their prime rates – typically the peg for business loans – in the immediate aftermath of the Fed’s rate decision.

Rates are likely to keep on rising. By the end of 2016, a large majority of the Fed’s rate setting committee expects to raise the benchmark rate by at least a full percentage point, according to projections.

 

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