Interest rates are going up: how this impacts credit card debt in the US

Interest is growing and has already reached a record, surpassing pre-pandemic effects. Now it's time to prepare for what might happen in the coming months. Read this article to understand what's happening and predictions for the coming months.


The current state of the US economy

escalator illuminated by red light
Credit Card Debt Is Soaring! Understand what is happening. Source: Pixabay

In fact, during the pandemic, we’ve seen credit card debt plummet. Now, like on a seesaw, we see the reverse effect, as Interest rates are going up.

However, these recent market dynamics did not happen by chance and can be explained by very concrete facts. To understand what is happening and how your debts will behave in the future, keep reading this article.

In fact, if there was one good thing about the economy during the pandemic, it was credit card debt reduction. As of January 2020, the American population has accumulated credit card debt until it peaks at $1.098 trillion.

We can credit this movement to an emotional response to consumption in the midst of uncertainties about the future. In addition, news from Europe pushed prices higher in preparation for the market for difficult times.

Then, the pandemic came and card debts began to plummet like few times in history. In fact, people didn’t have as many options for spending their money anymore. After all, virtually all face-to-face calls were interrupted.

In addition, the first government aid began to appear. Thus, people used the income they had to pay their bills and, among them, the balances accumulated on the card. So, in 11 months, we’ve seen that debt drop to $970 billion.

However, the debt grew again in the following 15 months. Now, we’re back to pre-pandemic levels. As of April of this year, our revolving credit debt was $1.103 trillion.

Children sitting at table and eating healthy food during break at school

Not all students will have access to free school meals: the impacts on US families

Free school meals will end this month as you know them. Understand what's happening and what to do to ensure your children's meals.

What is an interest rate and why they are going up

In effect, the interest rate is an amount charged by those who offer credit or loans to those who request this service. That way, you are subject to interest when you finance a car, take out a loan or take out a mortgage.

This rate is what guarantees a profit for the lender, as no one would risk lending money if it did not generate some return. Typically, the interest rate is described in annual terms.

Thus, we call it the Annual Percentage Rate (APR), that is, the percentage of interest you will pay in a year. Most mortgages use simple interest. Thus, you will always pay a percentage of interest on an initial fixed amount.

However, other services may charge compound interest. In these cases, the interest amount is always calculated on your initial debt plus accrued interest. Well, basically, that’s all you need to know about interest.

In fact, you may have noticed that the APR on your credit card and loans is more expensive. So, you might be wondering why interest rates are going up.

If you have been following the news for the past few months, you should know that we are facing an all-time high in inflation. Indeed, the vast majority of credit card APR is variable and respond indirectly to the rate of inflation.

So when inflation goes up, your card interest tends to go up with it.

What effect do higher interest rates have on credit card debt?

Graph indicating upward swing (Interest rates are going up)
Why is inflation driving interest rates so high? Source: Pixabay

In effect, the APR on a credit card is the fee you pay for holding a debt beyond its due date. So, based on that rate, your debt tends to increase even if you don’t accumulate new debt.

Thus, the higher the APR on your card, the greater your debt tends to be. In fact, this is the main effect of rising interest rates on your card debt. Understand interest as a “growth factor” of your card debt.

So, the higher the APR rate, the faster your debt will grow. As we said before, the interest rate of most cards is variable. Thus, they can fluctuate according to the Federal Funds Rate.

This is a base interest rate set by the government, more precisely by the Federal Reserve (Fed). Currently, the Fed is in a race against rising inflation. In fact, the main measure of this body has been the increase in the Federal Funds Rate.

Today, this indicator is 1.75%. Since all other interest rates are based on this index, there is a general rise in market interest rates.

Person using calculator and cellphone

What is budgeting? 7 easy tips to improve your money management!

"What is budgeting" is the question that, when answered, changes your financial life. Learn about the power of this feature!

How will the recent interest rate hike affect you?

From now on, any loan or credit service will be more expensive. Thus, the population that most depends on services like this will suffer the most.

Some time in advance, Matt Schulz, chief credit analyst at LendingTree, predicted that we would hit record credit card debt.

The analyst also highlighted that most households have little or no financial margin to sustain higher interest rates. Thus, the value of credit card debt is expected to grow even more.

Also, while interest rates are rising, many will have to put off dreaming of a home, a new car, or a student loan. In fact, this will be the biggest impact felt by the population.

To escape new bills, it will be necessary to “tighten your belt” and save as much as possible. In addition, with higher interest rates, people will find it difficult to undertake.

After all, it will be increasingly risky to take money out of the bank to invest in a business.

Will interest rates continue to rise in the following months?

worried looking statue
What to expect from the future of credit card interest rates in the coming months? Source: Pixabay

Unfortunately, we don’t have good news. Indeed, it is very likely that interest rates will continue to rise. Since March, the basic interest rate has already risen 75 points.

According to market analysts, the increase tends to be even greater. According to the CME FedWatch Tool report, most investors expect this rate to increase further.

Thus, by the end of the year, we can expect an accumulated increase of, on average, 200 points.

In fact, that would be enough to further increase credit card debt and push it to a new high. Indeed, what can we do in such a scenario? Matt Schulz has some advice.

Therefore, you should focus your attention on reducing your credit card debts. In fact, this is the only long-term measure that can prevent further damage.

As we watch interest rates rise, the financial market is experiencing a “bear market” moment. Is this a good time to invest? Click on the link below and find out.

grizzly bear dressed in death

We are now in a bear market: see how it affects your money

Are we in a bear market? Understand what is really happening in the market today and how it can influence your investments going forward.

About the author  /  José Gonçalo

I started reading about finance only to find better options than savings. Since then, I have never stopped studying finance, and I believe that writing about it is the best way to help individuals feel fulfilled and have a healthy financial life. Today, I balance finance and medical school studies.

Trending Topics


First Progress Platinum Elite Mastercard® Secured card: how to apply

Apply to the First Progress Platinum Elite Mastercard® Secured card and have a tool to build credit with a Mastercard accepted worldwide.

Keep Reading

Sable Debit Card full review: should you get it?

Meet the cash back debit card that promises rewards of nearly $1,200 a year: Sable Debit Card, the future of cards. Learn all about it here!

Keep Reading

Apply for Universal Credit Loan: No prepayment fees!

Do you need ways to get the best loan options with good terms? If so, you can read on to learn how to apply for Universal Credit Loan!

Keep Reading

You may also like


Credit cards for any credit history: best options

Are you looking to build your credit? Our list of 7 great credit cards for any credit history can help you. Click and choose your best fit!

Keep Reading

Managing your mortgage: best tips for a healthier relationship with your money

It's time to talk about managing your mortgage. See these expert tips for staying on top of your payments and keeping your finances healthy!

Keep Reading

Personal loan: what is it and how does it work?

Understanding what is a personal loan gives you the ability to use this resource intelligently and escape unnecessary debt. Learn more here!

Keep Reading