Federal Reserve Move Hurts Some Credit Card Users

[jeffrey]

The Federal Reserve Board decided to continue where it left off at the end of 2004 by once again increasing short-term interest rates by 25 basis points (0.25%) this week to 2.50%. Although this is the first increase this year, it's the sixth time in the last year for a total of 150 basis points (1.50%) since June 2004. At that time the rate was at 1%, a 46 year low.

The action will raise the prime rate which is used by most credit card issuers to 5.50% and the result will be that those who carry a balance on their variable rate credit cards will be paying more in interest charges.




The increase in interest charges will affect approximately $330 billion in credit card balances and cost consumers an additional $825 million in additional interest over the next year. The six rate hikes combined will cost consumers approximately $5 billion in extra interest charges over the next twelve months.

While the news is bad for those that carry a balance on variable credit cards, the Federal Reserve change will be welcomed by those that keep savings in the bank. The increase will likely raise the interest rate that banks and credit unions give to their customers.

The increase in the Federal Reserve rate will also likely have an effect on mortgage interest rates according to analysts, but not as much as short-term rates. Many analysts are predicting that the 30 year mortgage rate could reach 6.5% by the end of the year. The average 30 year mortgage rate currently stands at 5.66%