Average credit card interest rate on May 26: Near record highs

Credit card interest rates are heavily influenced by the federal funds rate, which is what it costs banks to borrow from one another. The Federal Reserve raised that benchmark by another quarter point on May 3, the latest in a string of 10 consecutive hikes aimed at cooling inflation. That increase brought the federal funds rate to its highest level since the summer of 2007.

As a result of the increase, nearly half of all credit cards could soon charge greater than 20% interest on balances, according to CreditCards.com’s estimates. While Fed Chair Jerome Powell seemed optimistic at the beginning of May that the hikes might pause in June, meeting minutes released May 24 show other Fed officials are more hesitant. If the Fed does hike interest rates again in June, that means credit card interest rates will keep pushing even higher.

Americans paid $120 billion in credit card interest and fees in 2022, according to the Consumer Financial Protection Bureau. That number is expected to rise this year because of the dramatic increase in interest rates. 

People with credit card debt are among the hardest hit when the Fed raises interest rates. Credit card issuers base their APRs on the prime rate of their associated banks. (The prime rate is the interest banks charge when lending to customers with good credit.) And banks base their prime rates on the federal funds rate. So any time the federal fund rate goes up, the prime rate rises too — and so do credit card APRs, in some cases as soon as one or two billing cycles after the hike. Following the Fed’s May meeting, the federal funds rate was set at 5%-5.25%.

While inflation seemed to be slowing during the first few months of the year, data for April paints a more discouraging picture. Consumer expenditures increased 0.4% in April and 4.7% on an annual basis, 0.1% higher than expected, according to the commerce department. Meanwhile, consumer spending was up 0.8% in April, twice what economists expected — and a sign that the economy remains resilient, despite increasing prices and rising interest rates.

Meanwhile, the Fed’s meeting minutes revealed that some officials believe more rate hikes will be necessary to bring inflation down to the 2% target. Some members of the committee called the headway on inflation “unacceptably slow” and wanted to “retain optionality” for further rate hikes.

If the Fed continues its streak of rate hikes in June, borrowers will feel an even bigger pinch as APRs follow suit. But even if there is a pause, credit card APRs aren’t likely to drop this year. That won’t happen until the Fed starts cutting interest rates, which it has said won’t happen during 2023.

The average APR on credit cards is 20.62% as of May 24, up from 20.58% on May 17. Six months ago it was 19.28%.

The average APR on low interest credit cards is 17.82% as of May 24, up from 17.79% on May 17. Six months ago it was 16.37%.

The average APR on cash back credit cards is 19.93% as of May 24, up from 19.91% on May 17. Six months ago it was 18.90%.

The average APR on airline credit cards is 20.43% as of May 24, up from 20.36% on May 17. Six months ago it was 18.88%.

The average APR on rewards credit cards is 20.39% as of May 24, up from 20.34% on May 17. Six months ago it was 19.08%.

It holds true no matter what but especially when interest rates are high: As often as possible, pay your credit card balance in full each month to avoid accumulating burdensome debt. But that’s not the only rule of thumb for being savvy about credit card usage. Here are five more tips:

1. Pay your bill on time. The No. 1 factor affecting your credit score is how consistently you pay your bill by the deadline. Good credit is important for so many reasons — it plays a role in whether you’re approved for loans and also helps you qualify for better interest rates. Potential employers may also pull up your credit score to assess how financially responsible you are. Set a reminder if you need to so you never miss a deadline.

2. Keep your spending in check. One of the biggest dangers with credit cards is living beyond your means. Not only can that put you at risk of falling into debt but higher credit utilization can also impact your credit score. Credit utilization is how much of your available credit you use each month. Avoid racking up a high balance to help keep your credit score in check — and keep your bill manageable. 

3. Pick a credit card that matches your habits. Rewards credit cards can be a great way to save on purchases that you’re making anyway. But the type of card matters if you want to maximize your benefits. For example, if you travel a lot, an airline miles credit card might be a good choice. Or if you’re loyal to certain big box stores, a branded credit card that gives you a percent back on your purchases there could help you save. If you just want flexibility, consider a cash back rewards credit card.

4. Don’t open too many credit cards — and keep your first one open. A lengthy credit history that doesn’t include too many accounts is another way to help build credit. Everytime you open a new credit card, the issuer performs what’s called a hard credit check, which will temporarily lower your score. So if you do that too often, it can make it harder for you to qualify for other types of credit, such as a mortgage.

5. We’ll say it again: Always pay your full balance. If you don’t carry a balance, it doesn’t matter that APRs are rising because you won’t have to pay any interest on your purchases. Make a budget each month and stick to it — your bank account will thank you.

Editorial Disclosure: All articles are prepared by editorial staff and contributors. Opinions expressed therein are solely those of the editorial team and have not been reviewed or approved by any advertiser. The information, including rates and fees, presented in this article is accurate as of the date of the publish. Check the lender’s website for the most current information.

This article was originally published on SFGate.com and reviewed by Lauren Williamson, who serves as Financial and Home Services Editor for the Hearst E-Commerce team. Email her at [email protected].