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Authorities at the Federal Reserve and experts on Wall Street refer to it as the “December liftoff,” but it doesn’t have anything to do with a NASA launch or the kickoff of the holiday season. The lift they are talking about refers to interest rates – and it may have already impacted your own credit cards.
Experts Expect a Steady Climb
Interest rates have been historically low for years. In fact, the prevailing rates – those that help set the amount of other rates such as those on auto loans, mortgages, and credit cards – have been hovering right around 0% for nearly a decade. Card holders are most concerned with the prime rate because variable interest rates are usually tied to the prime rate, so when it rises, so does variable interest.
The prime rate is a short-term interest rate determined by individual banks. You can think of it like the cheapest rate that’s extended to the most credit-worthy borrowers, such as large corporations. Banks use the prime rate to set the price, or interest rate, on many of their commercial loans and some of their consumer loan products. When the Fed raises the rate it charges to lend money to banks, banks will raise the prime rate to compensate for that change.
The reason for such low rates for so long was the government’s fear of inflation that could sink the nation back into a severe recession. Now that the economy is relatively healthy, the Fed has announced that it will begin raising rates. The initial liftoff keeps being postponed because of lousy news in the economy, but in mid-November many economists estimated the first rate hike to happen in December. It’s now looking like it won’t be until mid-December, but when it does, virtually all adjustable rate loans will be impacted, and will likely rise in tandem.
The Climb Has Begun
The APR on your credit card, which is typically a variable or changeable interest rate, may have already gone up in anticipation of the rate increase. Capital One, for example,just recently increased the APR on all consumer credit card offers. The increased rate from the Feds is passed down to the consumer in order to help soften the effects of the rate change for the banks.
The first sign you’ll likely see is a standard letter or announcement from your credit card company, as they have to notify you about that kind of change ahead of time due to federal regulations.
Chase Sapphire Preferred® Card customers, for example, may have received a notice or disclosure from Chase explaining that “changes to the Annual Percentage Rates (APRs) described below are to standardize these terms for cardmembers” and that the changes affect “transactions made on or after 11/18/2015. Changes include:
- Cash Advance APR: Increased from 19.24% to 24.99%. The same holds true for the Overdraft Advance APR.
- Balance Transfer Fee: Increased from $5 or 3%, whichever is greater to $5 or 5%, whichever is greater.
These are relatively small numbers at first glance, but if you take a close look, the revisions are enormous. A jump from 19.24% to 24.99% is, for instance, a rate increase of nearly 30%. Changing a balance transfer surcharge from 3% to 5% is an increase of more than 65%. Let’s say, for instance, that you do a balance transfer of $5,000. The current fee would be $150 or 3%, whereas the new fee would hit you with a charge of $250.
What’s in Store for the Holidays
Consumers can expect to start seeing more of these revisions and disclosures in the coming weeks especially if the Fed decides to go ahead and initiate rate increases at the December meeting of the Fed.
Cardholders do have the option to reject these rate hikes, which may be comforting to hear; however, if you decide to contact your card issuer and reject the hike, they have the right to cancel your account. Most, if not all, card disclosures state that in their disclosures – that if you don’t agree with the rate hike your account will be automatically closed.
*Editorial Note:This content is not provided or commissioned by the credit card issuer. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved or otherwise endorsed by the credit card issuer. This site may be compensated through the credit card issuer Affiliate Program.
*The content in this article is accurate at the publishing date, and may be subject to changes per the card issuer.