Your Credit Card Debt May Be About to Get More Expensive. Here's Why

If you're carrying a credit card balance, you need to read this.

Credit card debt can be a very expensive type of debt because cards have high interest rates. 

If you pay off your balance in full, you don't have to worry about that because you won't pay interest. But if you carry a balance, you can expect to pay upwards of 17% in most cases. That's what makes paying off a credit card bill so difficult. 

Unfortunately, for those carrying a balance -- or for anyone who may do so in the future -- things could actually get worse. Credit card interest rates could be climbing even higher, which means it will cost you more and take more time to become debt free. 

Here's why credit card interest rates are going up

Credit card interest rates are increasing for borrowers for one simple reason. The Federal Reserve has raised interest rates several times this year and is likely to do so again in the near future.

Credit cards come with variable interest rates, which means the rate adjusts in accordance with the movement of a financial index. Many cards are tied to the prime rate, which moves along with the Fed's target rate. When the Federal Reserve raises rates, this causes the prime rate to go up and causes credit card companies to also raise their rates. 

The Federal Reserve is the central bank of the United States and one of its goals is to help fight inflation. Inflation has been surging, with the most recent reports indicating the price of goods and services was up 9.1% in June compared with the prior year. 

The Federal Reserve's target rate of inflation is 2%, which is obviously well below the rate at which price increases are occurring right now. In light of the fact that inflation is currently at around a 40-year high, there's intense pressure on the Federal Reserve to keep raising interest rates to tighten the supply of credit. This reduces money available to be spent, which in turn reduces the demand that's creating inflationary pressures. 

If the Federal Reserve raises rates again this year, which it's already forecasted it will do and which is the most likely outcome given the high inflation numbers, you can expect that your credit card rate is going to keep going up and your debt will get even costlier.

What can you do to avoid high financing charges?

The best thing to do in light of the fact variable rate credit card debt is becoming more expensive is to pay off what you owe. Credit card debt is not generally considered to be "good debt" because of the high rates. So paying off your balance is always ideal when you can do it -- and that's even more true now since financing charges are likely to keep going up. 

If this isn't feasible for you, you may want to look into techniques that could prevent an interest rate increase. You could, for example, apply for a balance transfer card and transfer your existing balance onto it. 

Balance transfer cards have 0% promotional rates, although there is typically a small upfront fee of around 3% to 4% of your transferred balance. Compared with the interest you'd pay over a year, that fee is well worth it. Just be aware, though, that you have a limited time when the 0% rate is in effect. It usually lasts for about a year before going up. 

You could also look into a fixed-rate personal loan to refinance your cards, which would enable you to lock in a more affordable interest rate for the entire repayment period.

Exploring these options is a good idea with the Federal Reserve likely to raise rates again, as you don't want to devote even more of your hard-earned money to paying back your creditors what you owe.