The interest rate hike you may already be paying for

For about 19 months, the Federal Reserve has been on an inflation-fighting campaign, influencing higher interest rates across the economy. The interest rate that may be affecting the majority of households is costly, and one that they may have overlooked.

If you ask someone what their mortgage rate is, they will most likely be able to tell you. If you ask them for the interest rate on one of their credit cards, expect a blank stare. However, according to data from the New York Fed, we collectively carry more than $1 trillion in credit card debt across 578 million credit card accounts as of the second quarter. And, according to an early 2023 NerdWallet analysis, the share of American households carrying a credit card balance — roughly 47% — outnumbers mortgages (40%) and auto loans (41%).

Credit card interest rates have risen from just over 16% in February 2022, before the Fed began raising rates, to just over 22% in May 2023. If you carry a balance from month to month, this quiet increase could cost you hundreds or even thousands of dollars.

It’s easy to overlook your credit card interest rate.

Every month, I log into my credit card accounts, quickly scan the charges to ensure I’m the one who made them, and then make a payment. I pay the entire balance nine times out of ten. I don’t put much effort into this task, and I don’t look for the interest rate. I simply do not. But, for the sake of this article, I went looking.

It took me about four minutes to find it — not bad, but it wasn’t among the numerous numbers on my account’s home page. Instead, I pulled up my monthly statement and scrolled to the last page. In other words, if someone isn’t actively looking for the interest rate, they’re unlikely to find it and won’t know what they’re paying.

A few percentage points can translate into hundreds of dollars in interest.

You’re probably paying interest if you don’t pay off your credit card balance each month. I say this casually, not to chastise. Carrying credit card debt is sometimes necessary, and even when it is not, it can be a difficult habit to break. However, it is expensive.

There are numerous ways to pay off a credit card. Let’s take a look at a few options and how a small increase in interest affects the costs.

A three-year repayment plan

Assume you have $10,000 on a credit card and have resolved to pay it off first in order to avoid making additional purchases. You’ve devised a strategy to pay off the debt in three years and used a loan calculator to calculate the payments required to do so. If the interest rate is 16%, your monthly payments would be approximately $352, and you would pay $2,687 in interest over the three-year period. If you were charged 22% interest, your monthly payments would be about $30 higher, and you would pay about $1,000 more in interest over the course of the loan.

To illustrate, all payment and interest calculations in this article assume that the interest rate remains constant throughout the repayment period.

A monthly payment plan of $300

Maybe those payments are too high for you, but you know you can consistently make a $300 monthly payment.

In that case, paying 16% interest on a $10,000 balance would take three years and nine months and cost $3,366 in interest charges. If you paid 22% interest, it would take 4 years and 5 months and cost about $2,300 more.

Only make minimum payments

Minimum payments are typically set at a percentage of your balance (2%-3%) or a flat fee (typically $20-$30), whichever is greater. Making only the minimum payment will keep the account from going into default, but it will mean many years of payments and thousands of dollars in interest.

Making minimum payments on a $10,000 balance at 16% interest for 17 years and 4 months would take 17 years and 4 months and cost $7,835 in interest. If you paid a 22% interest rate, it would take 23 years and 10 months and $15,322 in interest.

In conclusion

Credit cards are a useful tool, but the cost of using them can be high. Though the difference between 16% and 22% is easily overlooked, it can have a significant compounding effect on your ability to pay off credit card debt.

If you’re having trouble making credit card payments right now, contact your card issuer first. It would prefer to see you pay rather than not, and may be able to work out a lower interest rate or a different due date to assist. If the assistance it offers is insufficient, consider credit counseling through an accredited nonprofit organization. A credit counselor can assist you in developing a debt repayment strategy and a budget for long-term financial security.