Answer (from MarketWatch based on NerdWallet analysis): $1.6 billion

From MarketWatch:

The Federal Reserve raised its target range for federal funds by a quarter percentage point to 0.75%-to-1% on Wednesday, and signaled two more rate increases in 2017. Put another way, this increases how much banks will be charged to borrow money from Federal Reserve banks. (The Fed raises and lowers interest rates in an attempt to control inflation.)

I know some of you are trying to figure out how that decision from the Federal Reserve translates into higher costs for credit card revolvers. Here is the transmission mechanism:

• Fed raises fed funds target rate
• Banks raise their prime rate (the lending rate they charge their best customers)
• Credit card interest rates are variable and are tied to the Prime Rate so as Prime Rate increases…you can figure out the rest!
  • A 1/4 point fed funds rate increase translates into prime rate increasing by 1/4 and therefore credit card interest rates go up 1/4 too
• For those carrying a credit card balance (revolvers), the higher interest rate is applied to their outstanding balance

I thought I would try and recreate the Nerd Wallet analysis and here is what I found:

• As of February 2017, Americans have $779 Billion in credit card debt (per Federal Reserve data in the article)
• 1/4 of 1% applied to that balance is $1.9 billion but that is for the full year. This effect will likely take place starting in April so 3/4 of the year which is about $1.5 billion, close enough to their estimate.
• Assuming future rate increases by the FED, credit card revolvers will continue to feel the pain

At this point, some of you may be saying, but isn’t this going to be great for savers….well, that mechanism seems to work a bit more slowly as the average savings account is still stuck in the 0.11% range per Bankrate. From Fortune:

Data shows that though the major banks are lightning fast at hiking rates on loans, they take their time in raising the rates they pay out on savings accounts.

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

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