The Federal Reserve's latest interest rate hike means your credit card debt will likely get more expensive to pay off if you carry a balance month to month.
Last Wednesday, the Fed increased interest rates for the 10th straight time, but signaled it may be the last one of the year. The central bank increased its benchmark rate by 25 basis points, bringing the federal funds rate — the interest rate banks charge each other when lending money — to a range of 5% to 5.25%.
The Fed has continually raised rates since March 2022 in an effort to combat inflation, since raising rates makes it more expensive for consumers to borrow money.
"The theory is that businesses and consumers will spend less when interest rates are higher and debt becomes costlier, thereby constricting economic activity and slowing the rate of price increases," Ted Rossman, senior industry analyst at Bankrate.com, tells CNBC Make It.
Although inflation cooled slightly this March, April prices remain 4.9% higher than they were a year ago, according to the U.S. Bureau of Labor Statistics' latest available data.
How Fed interest rate hikes impact credit card debt
Banks use the federal funds rate as a starting point when determining the prime rate, which is the interest rate that's passed onto consumers. It's usually about 3% higher than the federal funds rate. Currently, it's 8.25%, according to J.P. Morgan Chase.
However, it's rare that you'll receive a credit card with that interest rate. Typically, credit card interest rates are much higher to account for the costs incurred by the card issuer and the risk of some cardholders not paying back their debt, Rossman says.
Currently, the average credit card annual percentage rate (APR) is about 22% for new offers and 20% for existing accounts, according to WalletHub's "Credit Card Landscape Report."
Since most credit cards have variable APRs, they can increase or decrease in response to changes in the federal funds rate. The Fed's latest 0.25 percentage point increase is likely to cause your credit card APR to increase as well by about the same amount. For example, if your credit card APR is 20%, it may increase to 20.25%.
After the Fed changes rates, you should see the change within a month or two, Rossman says.
Tips for tackling credit card debt
If you're carrying a balance from month to month, costly interest charges can cause your debt to balloon quickly. Luckily, there are a few things you can do. Here are two steps you can take immediately to tackle your credit card debt.
1. Call your credit issuer
Over the past year, 76% of people were granted a lower interest rate on one of their credit cards after asking, according to LendingTree's April survey.
Those findings demonstrate cardholders have more power than they might realize when fighting high interest rates, especially if they have good credit, Matt Schulz, chief credit analyst at LendingTree, writes in the April report.
"You really have nothing to lose, so pick up the phone and make the ask," he tells CNBC Make It.
2. Use a high-yield savings account to pump up your savings
"If you pay off your credit card debt but don't have any savings, the next trip to the vet or flat tire will just go onto your credit card and you'll be right back in debt," Schulz says.
Having funds saved up can prevent you from having to reach for your credit card whenever you're faced with an unexpected expense. And a high-yield savings account can help you earn a higher return on your money.
"After years of microscopic returns on savings accounts, many high-yield accounts are offering 4% or more back," Schulz says. In comparison, the average annual interest rate for traditional savings accounts is 0.39%, according to the Federal Deposit Insurance Corporation's (FDIC) latest data.
"That can add up to real money that helps your emergency fund grow faster than you'd realize, which is crucial because robust savings are key to getting out of debt," Schulz says.
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