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How The Fed Rate Hike Will Effect You – MarketWatch

March 15
14:15 2017

Bad news for those with credit card debt: When the Federal Reserve wraps up its meeting on Wednesday, your interest may rise almost immediately.

The Fed is expected to raise its target range for federal funds by a quarter percentage point, to 0.75% to 1% at the end of its two-day meeting on Wednesday. (In other words, the Fed is expected to announce an increase in how much banks will be charged to borrow money from Federal Reserve banks. The Fed raises and lowers interest rates in an attempt to control inflation.)

That increase will most likely eventually be passed on to consumers, said Sean McQuay, a credit card expert at the personal finance website NerdWallet. Many households with credit card debt — the average household carrying credit card debt has more than $16,000 — will likely take a hit.

Here’s how a Fed rate increase could impact your credit cards and bank accounts.

Credit cards

Because a rise in the federal funds rate means banks will likely pay more to borrow from the Federal Reserve, they may pass that cost on to consumers.

Credit card interest rates are variable (banks and credit card companies should state that their rates are variable in the literature customers receive to learn about their cards), and they are tied to the prime rate, an index a few percentage points above the federal funds rate. It is a benchmark that banks use to set home equity lines of credit and credit card rates; as federal funds rates rise, the prime rate does, too.

As a result, credit card holders are likely to see their interest rates rise, and that will happen soon, said Greg McBride, the chief financial analyst at the personal finance company Bankrate, told MarketWatch.

When the Fed raised the rate in 2015 — the first rate hike since 2006 — it only took about a month or two for the majority of banks that the personal finance website NerdWallet works with to change the variable APRs on their credit cards, McQuay said. They included both major banks and lesser-known ones.

What’s more: Banks are under no obligation to let their customers know they are raising their credit card rates when the Fed announces an interest-rate increase, so consumers should check on their own to find out if their rates are rising, McQuay said.

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