Whether you realize it or not, inflation in the United States economy has an effect on your credit card interest rates. As inflation worsens, the Federal Reserve raises interest rates, making borrowing more costly for banks and consumers. This directly affects the prime rate, which is always placed at 3% above the federal rate.
So, why do the Feds keep raising the interest rate? Simple. The Feds believe that increasing the interest rates discourages borrowing and spending, which will help settle down the economy. By decreasing the demand, the Feds hope to calm down an over-stimulated economy.
Unfortunately for anyone using a credit card with a variable rate, this means higher finance charges. Prior to June 30, 2004, the federal rate had remained at just 1% for quite a long while. This meant the prime rate was a reasonable 4%. Since then, the rate has been increased 17 times with a quarter point increase each time.
Due to the ever-rising federal rate, it is important to keep an eye on your rate at all times. A credit card with a fixed rate is the best option, but watch those rates as well. Even on fixed rate credit cards, the card company can increase your rates after giving you a fifteen day warning. Of course, the best way to avoid rising interest rates is to pay your balance off in full at the end of each billing cycle.