Federal Reserve Rate Hike Hits Credit Card APRs

The Federal Reserve has increased its benchmark interest rate by 25 basis points in its latest meeting. This move will impact various consumer credit products, including mortgage rates, auto loans, and credit cards.

For credit card lending, the cost of funds is an essential factor in setting prices. The prime rate, which serves as a reference or 'base rate' for many types of loans, including personal loans, small business loans, and credit cards, moves closely with the federal funds rate. When the Federal Reserve changes the federal funds rate, the prime rate generally follows suit, affecting interest rates on credit card balances.

According to Dr. Paul Calem's research, increases in general market interest rates account for about half of the increase in the average credit card interest rate over the past decade. The remaining half is driven by developing credit risks and an upward trend in the card delinquency rate.