By Steven Dashiell. Originally published at ValueWalk.
After two years of leniency from lawmakers and credit card providers, the cost of using a credit card is about to get pricier. Increases to credit card merchant fees and rate hikes from the Federal Reserve will result in bigger card interest rates through 2022 as well as a potential increase to specific goods purchased with credit cards. Here’s what we know.
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Providers Lenient Through The Pandemic
The COVID-19 pandemic heavily disrupted consumer spending and businesses over 2020 and 2021. The economic burdens placed on consumers led card providers to offer relief programs that waived particular fees associated with late or missed payments, tweaked reward categories and otherwise alleviated any strain placed on US cardholders during the pandemic’s early stages.
Alongside these provider concessions, US consumers received two stimulus packages from the CARES Act. On top of stimulus payments, the CARES Act also offered other benefits, including expanded unemployment benefits.
These provisions, in combination with cautious consumer spending during the pandemic, led to an impressive improvement in consumer credit scores and debt levels by the end of 2021. But as the US economy returns to a state of relative normalcy, businesses and card networks alike are moving forward with tweaks to rates and fees as we head into 2023.
Increases To Interchange Fees
Card networks sought to increase interchange fees back in 2019 but delayed implementing the increase after pushback from businesses suffering under the pandemic.
Generally, card networks review their interchange fees twice a year. Businesses pay these interchange fees whenever a consumer uses a credit card to make a purchase and are usually anywhere from 1% to 3.5% of a purchase.
However, some businesses are hit harder by these fees than others. Retailers that primarily serve consumers through an online presence, for example, may pay more annually on these fees than a local shop, and small or local businesses are more likely to suffer from larger interchange fees than bigger businesses.
To offset these interchange fees, businesses may take a few courses of action, such as adding a surcharge to credit card purchases or increasing product prices on the whole. Alternatively, retailers may also incentivize consumers to use cash or debit. If you have ever wondered why it costs more to pay for your gas with a credit card than with cash, interchange fees are a large part of the reason.
These interchange fees are likely to take effect in April, though how retailers respond will differ from business to business.
Federal Reserve Begins Rate Hike
Inflation is the other culprit in rising card costs as the Federal Reserve raises interest rates for the first time in over three years. While the first hike raises the interest rate by just 0.25%, the Federal Reserve indicates that it’s prepared to raise them further to aggressively combat rising prices.
Credit card interest rates are based on this prime interest rate set by the Federal Reserve. Card providers will typically adjust their card APRs depending on this prime rate and on the severity of the increase or decrease.
At just 0.25%, only a few providers have adjusted their APRs as of this writing. But if rates increase by a whole percent or more — with some predicting increases as high as 3% — we can expect most card providers to adjust their APRs accordingly.
This rate hike isn’t a big deal for US consumers who regularly pay their credit card balances in full each month. The increase is a more significant blow to those who need to carry a balance, directly leading to larger interest payments and bigger debt increases over time.
Minimizing The Costs
Despite the rising costs of using a card, US consumers still have avenues for mitigating these increases. Chief among them is paying one’s credit card balance in full each month, ideally through automatic payments. This is a standard best practice in the credit card space that avoids a majority of a credit card’s potential costs.
If cardholders do need to carry a balance, opening a card with a lower-than-average APR or an intro APR period can help minimize interest gained on the balance. And there are several payment strategies available that can help pay down overall debt and minimize interest.
As for rising prices caused by increasing interchange fees, consider carrying more cash than usual or using your debit card for purchases. It’s a little inconvenient compared to paying with a credit card, but saving several cents per gallon on gas can add up — especially with today’s gas prices.
About the author
Steven Dashiell is a writer at Finder specializing in all things credit cards. With more than 300 articles under his belt, he aims to help readers embrace credit cards and maximize their rewards. Steve is studying to become a Certified Educator in Personal Finance, and is a frequent face on Finder’s YouTube channel, offering the latest in credit card hacks and advice. His expertise has been featured on numerous outlets, including U.S. News & World Report, Time, CBS, Fox Business, Lifehacker, Martha Stewart Living and more.
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