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ridvan_celik/E+/Getty Images November 02, 2022 Poonkulali Thangavelu is a senior writer and columnist at CreditCards.com and Bankrate, addressing debt and credit card-related legal and regulatory issues. Cathleen's stories on design, travel and business have appeared in dozens of publications including the Washington Post, Town & Country, Wall Street Journal, Marie Claire, Fodor’s Travel, Departures and The Writer. Bankrate logo The Bankrate promise
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The target Fed funds rate is the rate at which the Fed desires banks to lend money short-term to each other. The Fed aims for this rate, rather than explicitly setting it. That’s why it’s a target rate. During times when the central bank wants to boost the economy, it aims to keep lending costs low. A low interest rate regimen started in 2019 as some concerns about a global slowdown ensued. This rate-cutting action continued as the pandemic hit in 2020, causing the Fed to take down its target rate to a 0 percent to 0.25 percent range. The Fed also engages in other measures, such as , to release more money into the economy and lower interest rates. For instance, the Fed engaged in boosting the economy during the recession that started in December 2007 after the housing market collapse impacted the global financial system. Its target rate went down to the 0 percent to 0.25 percent range back then, too. It slowly started to raise rates beginning in December 2015. And the Fed is now taking measures to make credit more costly, in order to slow down the economy. With the fed funds rate in the 3.75 percent to 4 percent range in November, you might be wondering why the interest rate your card issuer is charging you is higher than 18 percent. (The is now climbing closer to 19 percent.) Considering that the U.S. was at 6.25 percent in early November, this is indeed a hefty markup! Why are credit card rates so high
So why is there such a big markup on credit card interest rates? For one, credit card debt is . It is not backed by any collateral, unlike a home loan, for one, which is backed by your house. If you take out a mortgage loan and default on it, the lender can repossess your house. Similarly, if you take out an auto loan and don’t keep your end of the deal to make payments, the lender can take back your car. Not only that, the delinquency rates on credit card loans tend to be higher than the rates for all consumer loans, according to . For instance, in the second quarter of 2022, while the delinquency rate on all consumer loans was at 1.29 percent, the rate on credit card loans was at 1.81 percent. Another aspect is that the Credit Card Accountability Responsibility and Disclosure Act of 2009 ( [PDF]) provided more consumer protection. This means card issuers face more risks and that is also reflected in their interest rates. For instance, among other protections, they have to give consumers advance notice of any hike in interest rates, as well as advance notice of any other significant changes. How you can get better card interest rates
While you as a consumer can’t manage the macroeconomic factors that cause the Federal Reserve to set its target interest rates, you can still aim for a better interest rate on your credit card debt. Some ways to do this include: Manage your credit responsibly so that you have . Those with higher credit scores pose a lower default risk to issuers and they accordingly tend to land better interest rates. Even if you have a higher interest rate and , you can pay less interest on your credit card debt if you make payments whenever you can. Since interest on the debt is compounded daily, any money you pay even before your payment is due will bring down the total interest payments you make. If you have held a card for a long time, you could try to with your issuer. Considering that it wants to hold on to your business, you might be able to wrangle a better rate. If you are going to be carrying a balance for a while, you could transfer it to a . In this case, you should be vigilant about paying off the balance before this so that you don’t end up in the same old place of facing a high interest rate again. You could also pay off a high interest rate card loan using a (which tends to carry a lower rate because it is backed by your home) or a personal loan. The bottom line
With interest rates climbing above 18 percent, the best thing consumers can do is ensure they are doing their research to make certain they are receiving a rate that’s on the lower end of a card’s APR range. The rate you get depends largely on your credit score, but if you connect with a customer service representative, you may be able to negotiate your rate. So, now would be a good time to aim for the you can wrangle. Have a credit card question for Poonkulali? Drop her a line at the page. SHARE: Poonkulali Thangavelu is a senior writer and columnist at CreditCards.com and Bankrate, addressing debt and credit card-related legal and regulatory issues. Cathleen's stories on design, travel and business have appeared in dozens of publications including the Washington Post, Town & Country, Wall Street Journal, Marie Claire, Fodor’s Travel, Departures and The Writer. Related Articles