Credit card interest rates soar to the highest they’ve been in 30 years

The increases are being driven largely by the Federal Reserve’s continued hikes to the Federal funds rate and will not only impact the amount of interest consumers pay on their debt, but will likely extend the length of time it takes to repay those bills.

Record APR increases in just one year

APR is the interest consumers pay when they carry a balance on credit cards beyond a single billing cycle. The new data from Bankrate shows that in addition to 19.04% being the highest APR in the past three decades for credit cards, it also represents a record increase for a single calendar year.

“We started this year at 16.30%, so the national average has increased by 274 basis points so far in 2022,” Ted Rossman, Bankrate’s industry analyst, said in an email statement. “Previously, the largest increase within a single year was 262 basis points in 2010, when the CARD Act took effect and led to huge changes in how credit card rates were set.”

What’s driving the APR increases? 

The soaring credit card APRs are a direct result of the Federal Reserve’s continued attempts to curb inflation. In pursuit of this goal, the Fed has repeatedly raised the federal funds rate—increasing it six times this year. Most recently, on Nov. 2, the Federal Reserve notched up the rate yet again, moving it to 3.75%–4%. When the benchmark rate goes up, so do rates on various forms of borrowing, including credit cards.

“This time it’s all about the Federal Reserve, which has raised the federal funds rate 375 basis points since March in an effort to combat the highest inflation readings in four decades,” Rossman explained.

In announcing the latest benchmark rate increase, the Federal Reserve said in a press release that inflation continues to be an issue that’s linked to “supply and demand imbalances.” And it seems the increases are not over yet. The same statement said the Federal Reserve “anticipates that ongoing increases” will be required in order to “return inflation to 2% over time.”

When will the latest increases hit your account? 

So what does this all mean for consumers and their credit card bills? It’s certainly not good news. Rossman said increases tied to Fed actions generally hit cardholder statements within one or two billing cycles. He also made clear that rate hikes will affect both new and existing credit card balances.

More importantly, Rossman explained, the rate hike will make it even harder for consumers who are struggling to repay debt.

“Let’s say you owe $5,000 in credit card debt. At 16.30%—the national average at the start of the year—minimum payments would have kept you in debt for 185 months and cost you $5,517 in interest,” said Rossman. “At 19.04%, that increases to 191 months and $6,546 in interest.”

It’s also worth noting that when interest rates go up, it not only impacts your overall balance owed, but also your monthly minimum payments. This is because the minimum you’re required to pay increases with your over balance.

4 ways to avoid or pay off credit card debt

Eliminating credit card debt can be challenging, especially amid inflation when the cost of everything from food to utility bills to gas is rising. Here are some steps that can help you pay off credit card debt or avoid using them altogether.

• Sign up for a 0% balance transfer credit card: If you’re already saddled with a lot of debt on a credit card and the APR is soaring, consider shopping around for a new credit card, and switching to a 0% interest balance transfer credit card. Often these cards allow users to go without paying interest for almost two years, said Rossman.
• Create a budget: In order to rein in your spending and decrease the need to use credit cards to get by, try establishing a budget that accounts for all of your monthly expenses and allocates money to cover them. 
• Eliminate excess spending: Establishing a budget can also help you identify and eliminate excess or wasteful spending. The money you free up by going through this step can then be used to pay down credit card debt more quickly.
• Start an emergency fund: It’s also good practice to set aside money each month in an emergency fund. This can help when unexpected expenses arise. Rather than relying on a credit card during such moments, you can draw from your emergency fund instead. Even contributing $20 a month to such a fund is a good start.