Impact Of Fed Rate Hike On Credit Cards Goes Beyond The APR

It is really here. Finally.

It has been impossible to escape the hype. Seemingly countless amounts of money are involved. A ridiculous amount of words have been written about its impact. It involves a mysterious force that most people simply don’t understand. And we’ve been waiting a long, long time to see it.

No, I’m not talking about the new Star Wars movie. (Although I do have my tickets purchased already.) This is all about the interest rate hike that the Federal Reserve announced on Wednesday. It was the first rate increase from the Fed since 2006 – a few years before the Great Recession.

The increase is small – just a quarter of a percent – and it will likely be the first of several to come over the next few years, but there is still a lot of ambiguity about how much of an impact it will have.

We do know some things, though. For example, now that the Fed has raised rates, virtually all American credit cardholders will soon see their card’s APR rise by the same amount. That’s because most U.S. credit cards are variable-rate cards, meaning that their APRs can change. Most variable-rate card’s APRs are tied to the prime rate. That means when the prime rate moves up or down, variable-rate credit card APRs will move up or down as well. And how does the prime rate move? It goes up or down based on the Fed’s federal funds rate, which is the rate that banks use to lend to each other.

The rate hike won’t just impact the card’s main APR. It’ll affect many different aspects of the card. A prime example: balance transfers.

Zero-percent introductory balance transfer offers are popular with both consumers and banks. Consumers love them because they can dramatically reduce the amount of interest you pay on your debt. Banks love them, in part, because they’re a great marketing tool. The right offer – and we’re seeing them as long as 21 months interest-free – can really help a card stand out from the crowd. These offers are possible, in part, because interest rates have been near zero percent for many years. However, rising rates could mean significant changes for balance transfers.

Simply put, if banks can’t borrow interest-free anymore, they won’t be too eager to let you do it either.

So does this mean the end of the zero-percent balance transfer offer? Probably not. That’s because there’s more to a balance transfer offer than just the APR, and banks could potentially look at those aspects of the card to increase revenue without having to get rid of the zero-percent APR. Here are a few examples:

• Introductory period length: That zero-percent offer doesn’t last forever. Currently, we’re seeing introductory periods as long as 21 months. Once rates start rising, that number will likely shrink.
• Balance transfer fees: Most balance transfer cards include a fee for doing the transfer. The most common fee is 3 percent of the transferred amount. As rates rise, we could see this fee jump. We may also see fewer and fewer cards choose to forgo these fees.
• Post-introductory-offer rates: What will your APR be once that introductory period ends? It’s an important question that many cardholders never think to ask. These APRs can range widely. However, with the Fed’s rate increase now a reality, it’s possible that these post-intro rates could creep higher.

Because the Fed rate hike is small, none of these changes are expected to happen immediately. However, these rate increases are a marathon, not a sprint. This rate hike is likely just the first of several over the coming months and years, and when you add them up over time, their impact will be significant and will require banks to make some changes.

Still, don’t expect those changes to kill off the zero-percent balance transfer offer – at least not yet. They’re simply too popular, with both banks and consumers. However, as the Fed tweaks interest rates, it will become more and more important for consumers to read the fine print that comes with those balance transfer offers. That’s because even though those zero-percent offers are enticing, the devil is in the details – and those details may soon look quite different than they do now.

Matt Schulz is Senior Industry Analyst at CreditCards.com. He is also a regular contributor to USNews.com’s My Money blog.