The Fed Just Raised Interest Rate Hikes. Here’s What It Means for Credit Card Borrowers

Inflation has been a nagging problem for consumers since mid-2021. And over the past two years, many people have had no choice but to dip into their savings accounts to cover basic expenses like food and housing.

The Federal Reserve has been trying to slow the pace of inflation, and it's done so by raising interest rates. In fact, the central bank hiked interest rates 10 times between March 2022 and May 2023 before hitting pause on rate hikes in June in response to cooling inflation.

But at its July meeting, the Fed made the decision to raise interest rates once more, to the tune of 0.25%. That's apt to make borrowing even more expensive across the board. And it's certainly bad news for consumers with existing credit card balances.

Rising interest rates are a problem for credit card borrowers

When you sign an installment loan, like a personal loan, you lock in a given interest rate and pay the same amount of money to your lender month after month until that debt is whittled down to $0. With a credit card, the interest rate on your balance can be variable and therefore rise and fall with market conditions. Since the Fed's actions are only driving borrowing costs upward, it means that if anything, the interest rate on your credit card debt is more likely to increase than decrease in the near term.

Of course, the more interest you're paying on your credit card balance, the harder it's going to be to shed. And also, the more you might run the risk of not being able to make your minimum monthly payments.

The latter is really not a good thing at all, though, because being late with even a single credit card payment could drag your credit score down in a very big way. Once that happens, you risk getting denied the next time you apply for a loan. Or, you might get approved, but at a very high interest rate.

It's a good time to chip away at your debt

The Fed's July rate hike may not be the last one it implements in 2023. Some financial experts predict that the central bank will opt to raise interest rates at least one more time this year. (For context, the Fed still has three more scheduled meetings before the year is up.)

That's why now's a really good time to pay down your credit card balance. Cutting expenses is one way to go about that, but that could prove difficult at a time when inflation is still driving various costs up. So a more efficient way to free up cash to pay off your credit cards is to look at getting a side job.

Despite the fact that some economists are still predicting a near-term recession, the labor market is strong, and that extends to the gig economy. Picking up a second job could do the trick of putting more cash in your pocket -- and allowing you to whittle down your credit card balances to minimize the amount of money you're forced to pay in interest.

The danger of carrying a credit card balance forward is losing scores of money to interest charges and getting trapped in a cycle of debt. If you already owe money on your credit cards, you clearly can't go back in time and change things. But you can do your part to try to eliminate that debt as quickly as possible.