Credit cards with interest rates pegged to the Prime Rate, such as those that indicate something similar to “These APRs will vary with the market based on the Prime Rate” will rise quickly after the Fed’s recent ruling to increase. Two more increases are expected this year.
Consumers will see modest increases.
- The rate hike on Wednesday could add $12.50 a year in interest to a credit card with a balance of $5,000 and an interest rate of 14.99 percent, the average in the fourth quarter of 2017, according to Fed data.
It is critical for card issuers to keep an eye on credit quality. $1 a month will not kill anyone, however, when you think of the leveraged consumer, there might be some unprepared challenges.
- But consider that approximately $62.50 a year has already been added as a result of the Fed’s previous five rate hikes since late 2015, and interest payments may be up by $100 at the end of the year.
- That mortgage owner could pay an additional $312.50 a month, or $3,750 a year in interest if the Fed follows through with two more quarter-point hikes this year.
Consumers have enjoyed low-interest rates since the Fed froze them during the recession, but the winds have changed. Maybe this is a good time to take advantage of better savings rates!
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
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