Credit card rates hit a new peak as mortgage rates climb again

It is now the costliest time to carry a credit card balance, new evidence of the toll that the battle on inflation is taking on Americans' finances.

The nation's average credit card rate hit 17.96% this week, according to Bankrate.com, beating the previous record of 17.87% in April 2019 and the highest since the Federal Reserve began a modern method of surveying rates in 1996.

Nicole Middendorf, an adviser at Prosperwell Financial in Minnetonka, said she's advising people with credit card debt to put their cards in a glass of water and store them in the freezer until they pay them off.

"If you have $4,000 coming in, you can't have $4,100 going out," Middendorf said. "If I'm spending more at the grocery store, something has to give, or you get a part-time job."

The Federal Reserve has implemented its fastest pace of rate increases in decades since March to try to curb inflation that eclipsed 9% earlier this year. The central bank has long aimed for an inflation rate of around 2%.

Almost all credit cards have variable rates that track the prime rate, which is typically three percentage points higher than the federal funds rate set by the Federal Reserve, according to Ted Rossman, senior industry analyst at Bankrate.com.

"So there's a direct pass-through from the Fed's actions to credit cardholders," he said. Plus, Rossman said, card issuers tack a profit margin onto the prime rate, often something like 12 or 13%.

"That would have been bad enough, but at 18.25%, those minimum payments will now drag on for 189 months and accumulate $6,241 in interest," he said. "That's an increase of $835."

Consumers are also seeing mortgage rates start to climb again after taking a reprieve earlier this summer. The average long-term U.S. mortgage rates rose to their highest level in two months this week.

Mortgage buyer Freddie Mac reported Thursday that the 30-year rate rose to 5.66% from 5.55% last week. One year ago, the rate stood at 2.87%.

Those higher rates are cooling the housing sector as potential home buyers are pushed out of the market by the prospect of adding hundreds of dollars to monthly mortgage payments. Sales of existing homes in the U.S. have fallen for six straight months, according to the National Association of Realtors.

Mortgage rates don't necessarily mirror the Fed's rate actions but tend to track the yield on the 10-year Treasury note. Recently, faster inflation and strong U.S. economic growth have sent the 10-year Treasury rate up sharply, to 3.24%.

She tells clients to pay off credit card debt with any cash on hand and then rebuild an emergency fund of six to 12 months of expenses in an insured savings account.

If that's not possible, Middendorf advises cutting discretionary expenses like fitness memberships and streaming services for a time and contacting your credit card company to seek a lower rate to get out of credit-card debt.

In case of a medical emergency, ask the hospital to organize a payment plan. For a job loss, cut your expenses to necessities and work down the debt when you can.

What about using credit cards for the rewards?