Credit card rates are high — and likely headed higher in 2023

The average credit card charges 16.13%, and by the end of 2022, there’s a good chance it will be at or near 17%. It’s always a good idea to pay down credit card debt as soon as possible. Now is an especially good time to sign up for a 0% balance transfer credit card.

Consider this: If you have $5,525 in credit card debt (the national average, according to Experian) and you only make minimum payments at 16.13%, you would be in debt for 194 months (a little more than 16 years) and would pay $6,160 in interest. The minimum payments would start at about $130 and decline a little bit each month as the balance goes down.

The longest 0% balance transfer offers are 21 months. If you sign up for one of these, you could make 21 equal payments of approximately $263 to knock out that $5,525 average debt without paying interest. Note that there would be an upfront transfer fee between 3% and 5% – in dollars, that ranges from $166 to $276 in our example – but it could be well worth it.

These cards include:

• The Wells Fargo Reflect℠ Card, which offers 18 interest-free months on balance transfers and new purchases that can be extended to 21 months if all of those payments are made on time. The regular variable APR is 12.99% to 24.99%. The balance transfer fee is the greater of $5 or 3% within the first 120 days of opening the account and $5 or 5% (whichever is greater) after that.
• The Citi® Diamond Preferred® Card gives 21 interest-free months on balance transfers and 12 months on new purchases. Its regular APR is 13.74% to 23.74%. The balance transfer fee is the greater of $5 or 5%.
• The Citi Simplicity® Card also gives 21 months without charging interest on balance transfers and 12 months on new purchases. The regular variable APR is 14.74% to 24.74%. The balance transfer fee is $5 or 5%, whichever is higher, and transfers must be completed within four months of opening the account.

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Why rates should rise in 2022

The Federal Open Market Committee, the rate-setting body of the Federal Reserve, recently released an updated summary of economic projections. Participants have a median expectation for the federal funds rate to rise 75 basis points in 2022. This would hopefully help stem the recent rise in inflation. It also reflects an improving economy that may no longer need the ultra-low rates that were instituted to provide financial support when the COVID-19 pandemic erupted in the U.S. in March 2020.

But even if one of the primary explanations for higher rates is a better economic climate, that’s cold comfort for someone dealing with high-cost credit card debt that could be about to get pricier.

How credit card rates are calculated

The federal funds rate is currently at a record-low level (0% to 0.25%). This is the overnight borrowing rate that banks charge each other. The prime rate, which banks charge their most creditworthy consumers, is typically three percentage points higher. Once the CARD Act went into effect in 2010, almost all credit cards tied their rates to the prime rate because aligning with a variable index became the easiest way to increase customers’ interest rates. When the federal funds rate goes up, credit cardholders usually see the increase within a billing cycle or two.

I should point out that what we call the average credit card rate is calculated by averaging the low end of the APR ranges offered by 100 popular cards, so it’s really the rate that people with better credit are charged. The average high end of the range – what cardholders with lower credit scores are charged – is nearly 24%.

The average account assessed interest is charged 17.13%, according to the Federal Reserve, which is one basis point shy of a record. That’s almost 14 percentage points higher than the prime rate, reflecting credit card issuers’ considerable profit margins.

Bottom line

As much as we’ve been hearing about incredibly low interest rates – on the federal funds rate and on mortgages, for instance – credit card rates are still quite high, largely because this is unsecured debt.

Don’t get trapped by the fact that a 75-basis-point increase would only raise the minimum monthly payment by $3 per month (comparing $5,525 in credit card debt at 16.13% and 16.88%). The real issue is that this is 16+ years’ worth of pricey debt. The total interest expense, if you’re only making minimum payments, would be more than what you charged in the first place. That’s the big deal.

It’s important to do whatever you can to pay off your credit card debt as soon as possible while accruing as little interest as possible. To accomplish this, besides 0% balance transfer cards, you might also consider a personal loan, nonprofit credit counseling, taking on a side hustle, cutting your expenses or selling unneeded possessions. Given the high interest rates, knocking out your high-cost credit card debt should be among your top financial priorities.

Have a question about credit cards? E-mail me at ted.rossman@creditcards.com and I’d be happy to help.