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Your credit card interest rate is a combination of two key factors, in most cases. When you apply for and get approved for a credit card, the issuer will evaluate your creditworthiness and assign you a credit rating, which determines your initial interest rate for purchases.
However, your initial interest rate isn't set in stone. Virtually all credit cards have variable interest rates that are tied to a benchmark rate. As an example, one of my credit cards has a 23.99% APR on purchases, but it is tied to the prime rate. The prime rate is based on the federal funds rate, which is the benchmark interest rate set by the Federal Reserve. When you hear that the Fed “raised rates,” the federal funds rate is what that usually refers to.
Here's what it means for you. If the Fed raises or lowers interest rates and your credit card has a variable interest rate (most do), your credit card interest rate will rise or fall by the same amount. With my 23.99% APR on one of my credit cards, if the Fed were to raise the federal funds rate by a quarter of a percentage point, my interest rate would become 24.24%.
In a nutshell, your credit card interest rate depends on your credit card issuer's assessment of your creditworthiness. But it also moves up and down based on economic forces outside of your (and your credit card issuer's) control. So, what will happen to credit card rates in 2024?
What is the Fed expected to do in 2024?
Four times a year, Federal Reserve board members and bank presidents release a summary of their economic projections.
According to the latest (September 2023) Summary of Economic Projections, the policymakers see the federal funds rate falling to 5.1% by the end of 2024 and to 3.9% by the end of 2025. Currently, the federal funds rate is set to a target range of 5.25% and 5.50%, so this implies that rates are expected to fall. And this would mean that your credit card interest rates would be lower in 2024 than they are now.
However, keep in mind that not even these expert policymakers have a crystal ball that predicts the future, and the actual outcome can be very different. In fact, as of the June projections, the members were calling for rates to fall to 4.6% by the end of 2024 and have since tightened their expectations.
Will your credit card interest rate be higher or lower in 2024?
To be clear, there is no way to predict with accuracy what will happen with inflation or the economy in general, and therefore there's no way to know for sure what interest rate moves the Fed will make. If inflation proves to be harder than expected to control, we could certainly see further interest rate hikes later this year and into 2024. But if the economy plunges into recession or inflation gets close to the Fed's 2% target, rates could fall even faster than the latest projections.
Regardless of what happens with your credit card interest rate in 2024, it's fair to assume that carrying a credit card balance will still be an expensive way to pay for purchases. If you have credit card debt, it could be a smart idea to check out the 0% intro APR balance transfer offers that are still abundant despite rising rates. You can also look into a personal loan to consolidate your credit card debt and potentially lower your interest rate.
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