Tompor: Credit card rates will jump as Fed tries to cool demand, drive down inflation

The Federal Reserve is on a mission to cool off demand and drive down inflation. And yes, you're going to face higher interest rates on your credit cards as a result.

Fed rate hikes tend to be passed along to credit-card holders within a month or two. If the Federal Reserve makes its first move to raise short-term rates at its next policy meeting in mid-March, as some expect, you could be looking at higher credit-card rates as soon as April or May.

"Card issuers have some flexibility, particularly with new customers, but credit-card rates typically track the federal funds rate quite closely," said Ted Rossman, senior industry analyst for CreditCards.com and Bankrate.com.

Most consumers already know that it's not cheap to borrow by pulling out plastic. Or swiping the credit-card app on your smartphone. The rate hikes ahead should give consumers one more reason to pay off their high-cost credit-card debt — and put a limit on how much they're willing to borrow by tapping into a line of credit on a credit card.

The average credit-card rate is 16.13%, according to data from CreditCards.com. Credit-card rates vary based on your credit history with those with lower credit scores paying higher interest rates on their credit cards.

"Credit-card debt is already very expensive and it will probably become even more costly in 2022," Rossman said.

Credit-card margins have already been creeping up, he said. For example, he said, the current 16.13% average is 12.88 percentage points above the prime rate, which is close to a record-high spread.

Most credit cards today don't offer fixed rates. They're variable rates that go up or down as short term interest rates move up or down.

"The high end of the range — what people with lower credit scores pay — averages around 24%," Rossman said.

The annual percentage rates, for example, for an AARP Travel Rewards Mastercard from Barclays range from 16.74 to 20.74 to 25.74%, based on your creditworthiness.

How much more will it cost to borrow on a credit card?

If some forecasts are accurate, the Fed could raise short-term rates by a quarter of a percentage point as many as four times or more in 2022. That means that interest rates on credit cards could ultimately go up on average to around 17% or higher by year end.

It's not a huge extra cost for borrowers but it is extra money that's going out the door. And some borrowers might want to reconsider how much they're using their credit cards if they're not paying off the bill in full each month.

The minimum monthly payment would go up by $4 a month — or $48 a year — if someone sees their rate go up from 16.13 to 17.13% and has a balance of around $5,525 on their credit card.

"The real issue is that credit-card rates are already very high," Rossman said.

Here are some options consumers can consider:

Some credit cards continue to offer a 0% introductory offer or a 0% balance transfer offer, even as the Fed is set to raise rates. A balance transfer can help you pay down debt while the 0% rate remains in place, say for nine months, 15 months or even up to 21 months in some cases.

Talk to a nonprofit financial counselor. Look at your credit-card statement for information on how to contact a credit counseling service. Some statements offer a number that will give you contact information for various services.