If you carry credit card debt, watch out for rising rates

Today, the Federal Reserve Board again raised prime interest rates, as one of many stories (NPR) explains. Expect your credit card company to pass the increase along by raising your rate, since most cards are tied to the prime rate banks pay to borrow from the Fed, which justifies its action as an anti-inflation tool.

Here at PIRG, we often ask the question, “What happens when the Fed lowers the prime rate, do the credit card companies lower your rate?” Answer: No, they usually don’t. So,  then, what can you do?

The most important thing to do — although it’s harder for families living paycheck to paycheck — is to avoid using credit cards for day-to-to expenses and running up a balance. Unfortunately, the CFPB reports that about half of consumers carry a credit card balance and “Interest income makes up the majority of revenue on credit cards, totaling about $100 billion per year.”

Pay down your credit card debt if at all possible. If you carry a $5,000 balance, at an average interest rate, you’ll pay $1,000 in interest each year and still owe $5000!

Especially, don’t make late payments. These subject you to punitive late payment penalty fees and result in even higher penalty interest rates.

Some consumers in very good standing, even if they carry a balance, may benefit from calling the credit card company and asking them to “deflate your rate,” as we’ve suggested for years. You might remind them if you’ve been receiving better-priced “balance transfer” deals, although we don’t recommend that all consumers “churn” or “flip” their cards. Gaming the system is not for everybody. It’s hard when someone else is making the rules!

One reason is that your credit score partially depends on “credit history length” or how long you’ve had credit accounts. But the most important credit score factors are (1) not making late payments and (2) good utilization of available credit. A good rule of thumb? Keep each card’s balance at 30% or less of its credit limit.

Fortunately, the CFPB is taking a hard look at credit card penalty fees and practices. The CFPB is the only federal financial agency with only one job, protecting consumers. Here’s more on PIRG’s work on credit cards.