Published in: Credit Cards | Jan. 29, 2019

These 2 Costly Credit Card Trends Could Hit Your Wallet

We are committed to full transparency as part of our mission to make the world smarter, happier, & richer. You should know that offers on The Ascent may be from our partners - it's how we make money. That transparency to you is core to our editorial integrity, which isn’t influenced by compensation.

The economy is looking up -- and so are interest rates.

Hands open up a wallet showing that the inside is empty.

Image source: Getty Images

The benefits of a healthy economy are many: lower unemployment, higher GDP, and increased income rates are just a few.

One of the less appealing consequences is rising interest rates. When the economy is doing well, central banks tend to slowly increase interest rates as a response in order to prevent inflation. As the cost of borrowing money increases, credit card issuers tend to pull back on promotional offers such as 0% introductory APRs and balance transfer offers.

Interest rates are increasing

Since December 2015, the Federal Reserve has increased interest rates from nearly zero to 2%. Two more increases will likely occur in 2018, and by 2020, the federal rate is expected to reach 3.5%.

Whether or not these changes will impact your wallet depends on what kind of debt you have.

  • Long-term loans and fixed-rate loans, such as mortgages and federal student loans, are the least affected by an increase in the federal funds rate. 
  • Auto loans are also largely unaffected. 
  • Adjustable interest rates, such as adjustable-rate mortgages and private student loans, will likely see increases eventually.
  • Credit cards will see the most immediate and significant increase.

It’s credit card debt, which is both short-term and adjustable, that is immediately impacted when interest rates rise. In fact, your APR has probably been rising along with the federal funds rate for a couple years now, and it will continue to go up. In 2015, the average credit card APR sat at just 14.90%. Since the previous interest rate increase in March of this year, average credit card APRs have gone from 16.87% to 17.02% in just three months.

Metric April 2015 March 2018 June 2018 2020 Expected
Average APR on credit cards 14.90% 16.87% 17.02% 18.6%

Data source: Bankrate. 

The federal funds rate is predicted to increase to nearly 3.5% by 2020. Assuming the average credit card APR continues to increase in line with the federal funds rate, it should hit roughly 18.6% in 2020.

This may sound like a minimal increase, but the effects on people who carry a large balance are certainly noticeable. According to WalletHub, the interest rate increases since 2015 have already cost Americans a collective $8.23 billion in interest payments. Estimates from CompareCard’s June Credit Card Debt Report show that this most recent hike alone will cost Americans $2.2 billion in additional interest payments.

0% APR introductory offers are on the decline

Credit card balance transfer offers have become one of the most popular ways to pay down debt quickly and with minimal interest fees.

Unfortunately, as interest rates rise and more folks look to these low-cost options to pay off their balances as quickly as possible, these kinds of offers start to disappear. Banks can only afford to offer 0% introductory APRs as long as enough people fail to pay off their balance before the introductory period for them to make a profit. When people pay off their balance in full before the introductory period ends and never use the card again, banks actually lose money.

A few factors suggest that Americans are headed toward being more responsible, and thus making balance transfer offers less profitable:

  • Unemployment is down to 3.8% as of May 2018, the lowest it’s been since 1969.
  • Although income has been lagging behind job growth for several years, wage growth finally picked up in January when it hit the highest annual gain since 2009.

Pair that with the increase in interest rates, and banks are slowly starting to clamp down on their 0% APR offers.

Earlier this year, John Gerspach, the chief financial officer at Citi, stated in an earnings call that “shortening or eliminating the promotional period on certain offers” may be a necessary response to rising interest rates.

The bank already decreased the introductory period on one of their cards from 21 months to 18 months. One of the most popular balance transfer cards, which offered a 15-month introductory period with no balance transfer fee, recently eliminated its balance transfer offer altogether.

How you can prepare

It’s important that you double down on your credit card debt and pay it off as quickly as possible. It’s not too late to use a balance transfer offer to help you pay off your debt, but if you don’t act soon, some of the better offers on the market may disappear.

Currently, the best offers have introductory periods ranging from 15 to 21 months, with some even offering a promotional balance transfer fee of $0 as well. You need to have an average to good credit score to qualify for most of these offers (650 or above), and you need to be able to pay off the transferred balance in full before the introductory period ends.

With high chances those offers will shrink and your credit card’s APR will continue to increase, now is the best time to take advantage of options for paying off debt faster.

Our #1 cash back pick has a surprise bonus

This may be the perfect cash back card! That's because it packs in $1,148 of value. Cardholders can earn up to 5% cash back, double rewards in the first year, and avoid interest well into 2020. With such a deep bench of perks you'll wonder how this card packs in a $0 annual fee. Best yet, you can apply and get a decision in two minutes. Learn more with our in-depth review.

Find the right card for you

0% APR & Low Interest