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How to Combat Inflation & Rising Credit Card Rates

Posted by Freedom First Credit Union on Oct 28, 2022 2:03:54 PM
Freedom First Credit Union


It’s pretty safe to say that everyone has felt the effects of inflation at this point. While some inflation is good for the economy, such a dramatic rise in a short period continues to send prices soaring. To stop the climb, the Federal Reserve continues to raise the federal funds rate – a move that further hits consumers’ wallets.

Many people are turning to credit cards to help manage rising prices and make ends meet. Unfortunately, moves by the Federal Reserve are causing credit card rates to spike – giving people a double punch right in the wallet. Rising prices plus rising interest rates can create a costly debt spiral that’s difficult to escape.

An effective way to prevent high-interest credit card debt from taking over your financial situation is through a balance transfer. But before you start transferring money, it’s important to understand why credit card rates are rising.
Understanding Variable-Rate Credit Cards

Nearly all credit cards today have variable interest rates. This means that the interest rate can fluctuate with the economy. Lenders use variable rates as a means to protect themselves from sudden shifts in the financial landscape – like what is happening right now.

Most credit cards are based partly on the Prime Rate. When the Federal Reserve raises the federal funds rate, the Prime Rate typically follows suit. So, what does this mean to you?

When you open a new credit card, the interest rate will often be expressed as Interest Rate + Prime Rate. For example:  12.99% APR + Prime Rate. Most people will focus on the 12.99% APR and assume that’s their rate, but it’s incorrect.

Let’s look at two different time periods as an example of what’s happening.


3/16/2020            Prime Rate = 3.25%         Example:  12.99% APR + 3.25% = 16.24%


9/22/2022            Prime Rate = 6.25%         Example:  12.99% APR + 6.25% = 19.24%


You can see that the Prime Rate has increased by 3.00% since March 2020. This means most credit card rates are now up 3.00% APR as well. And with the Federal Reserve likely to continue raising rates, credit card purchases will become even more costly.

But did you know that credit union loans - including credit cards - are capped at 18.00% APR? Banks and credit card companies can (and do) charge much higher rates to their customers, but the National Credit Union Administration only allows loans higher than 18.00% in some very specific circumstances.


Using a Balance Transfer Strategically

While you can’t stop prices from rising, you can relieve yourself from excessively high credit card rates. One effective tactic is to use a balance transfer.

A balance transfer allows you to move your current credit card balance from one or more high-interest credit cards to a new credit card, typically with a much lower interest rate.

The goals when using a balance transfer are to reduce the amount of interest you pay and make your existing debt easier to manage. Here are several tips to consider when using a balance transfer:

  • Find the Lowest Interest Rate: Your priority should be to find the lowest interest rate possible on your new credit card. That might mean forgoing extra perks, such as rewards, and that’s ok.

    If you’re taking advantage of a promotional offer (for example: 0% APR for 12 Months), ensure you know the rate after the promotion period ends.
  • Identify Hidden Fees: While finding a credit card with zero balance transfer fees is pretty easy, these costs are still common. If you’re taking advantage of a promotional offer, you’ll likely encounter some sort of fee. You want to ensure the balance transfer fee doesn’t set you back even more. Remember, your goal is to reduce your debt, not add to it.
  • Create a Plan: Once you perform your balance transfer, you want to create a plan to pay off your outstanding debt. If you’re using a promotional offer, you want to ensure your debt is repaid before the promotional period ends. Even when money is tight, it’s wise to chip away at your balance whenever possible.
  • Limit Future Spending: When prices continue to rise, it’s hard not to rely on your credit cards. But you never know what the economy will look like six months down the road. Interest rates will likely be even higher, and prices might follow suit. It’s better to view your credit card right now as more of a backup for emergencies than for everyday spending.


We’re Here to Help!

The combination of higher prices and rising interest rates creates a challenging environment for all. While inflation is out of your control, you can reduce how much you pay in credit card interest.

If you’re interested in a lower-rate credit card or want to transfer higher-rate balances to your Freedom First Credit Card, we’re here to help. Please stop by any of our convenient branch locations or visit https://www.freedomfirst.com/credit-cards.


Topics: Tips & Tricks, Personal Finance, Credit Cards

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