You probably know that when the Federal Reserve Board boosts or cuts bank lending rates, lots of other things are affected, too. Permit me to offer a specific example, because it could make a meaningful difference in your financial bottom line.
According to the nice folks at IndexCreditCards.com who run a "Credit Card Monitor" service, interest rates for credit cards have been rising along with Fed rate hikes. Last month, for example, after the Fed issued its 13th consecutive hike, the average credit card rate for the best borrowers surpassed 10% (specifically, it's 10.1% for standard, non-reward cards, and 11.4% for reward cards). The average rate for the average borrower, which was already above 10%, has climbed to more than 12.5%. These rates have inched up roughly half a percentage point in just two months.
[Note that some of the financial institutions surveyed include American Express (NYSE: AXP), Capital One (NYSE: COF), JPMorgan Chase (NYSE: JPM), Citigroup (NYSE: C), Wachovia (NYSE: WB), Pulaski Financial (Nasdaq: PULB), and Wells Fargo (NYSE: WFC).]
All this is useful information for us card users. For starters, it gives us a point of reference. If your card is charging you 14%, you might think that's pretty good -- until you learn what the average rate is. If you have reason to believe you're being charged an inordinately high rate, you can change that. You can call up your card issuer and ask that your rate be lowered, explaining that you're ready to transfer to another card. This is often enough to get you a lower rate. If it doesn't work, follow through and transfer your balance to another, better card.
You can learn how to lower your rate and can glean much more surprisingly interesting info about the credit card industry in our Credit Center, which also features tips on getting out of debt and guidance on how to manage your credit effectively.
Being aware of average rates and how they rise can also help you see the danger in credit card debt. Consider that the average borrower is now paying an average of 12.5% annually on his debt (the average American household with credit card debt owes upwards of $9,000, by the way). That's probably more than he can expect to make in the stock market and just about any other investment. The average annual growth rate for stocks over most of the last century is around 10%. If you invest in broad market index funds, which we recommend for most investors, that's roughly what you might expect to make over a long period, though you'll very likely earn somewhat more or less. If you fare much better than average and earn 12%, you'll still be losing ground compared with your credit card debt. Worse still, that credit card rate may well keep rising for a while.
Finally, note that these credit card rates are average ones. That means there are higher and lower rates out there to be found, if you do some digging. Click in to our Credit Center for tips on how to find the best card for your needs. We now offer spiffy Motley Fool credit cards that are worth looking into, as well.)
Your credit habits and record are a big deal -- being smart about credit can potentially save you tens of thousands of dollars. You can learn more in the following articles:
You can also read about all things credit-related on our Consumer Credit / Credit Cards discussion board.
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Longtime
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Selena Maranjian
does not own shares of any companies mentioned in this article.
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