Back in June, Credit Rodeo detailed the 7 risks of relying on your credit card to fund your lifestyle. As we approach a new financial year, many people will be evaluating their financial situation for 2018. With more households relying on their credit card we look at the economic factors that could affect credit card rates in 2018.

Higher Interest Rates

The biggest economic factor that will affect credit card rates is the Fed’s impending interest rate hikes. According to a report by Bloomberg, there could be at least 3 interest rates hikes this year.

When interest rates climb, it could impact the way consumers and businesses access credit. Consumers will have higher monthly credit card payments, while businesses will face higher costs when financing operations and payroll. Working off the Prime Rate — the lowest rate of interest at which money may be borrowed commercially — banks will have to determine how much credit an individual can borrow based on their risk profile.

Apart from monthly credit card payments, the rates for adjustable-rate mortgages and home-equity lines will also increase when interest rates go up. These loans will be more expensive because their value is directly linked to the Prime Rate.

Consumers should prioritize paying off some of their debt at the beginning of the year before interest rate increases makes it more expensive.

Inflation

Inflation will also be a key factor in influencing credit card rates. That’s because the higher the inflation, the higher the interest rates. Banks will demand higher interest rates to offset the decline in purchasing power of the money they receive from borrowers.

An increase in inflation means that consumers need to pay more for the products and services. Gas prices are usually first to suffer because they are connected to a lot of industries. Businesses will need to raise their prices to cope, and consumers are usually the ones who suffer from high inflation. US inflation rates are predicted to be 1.9 percent in 2018 and 2 percent in 2019 (which is down on 2.1 percent in 2016).

Consumer Confidence

The consumer confidence is a leading index that gauges the level of the public’s confidence with a certain economic activity. FXCM detail that a high level of consumer confidence stimulates economic expansion, while a low level leads to a slump. If interest rates go up, consumer confidence usually decreases. The overall measure of the effects of interest rates changes depending on the consensus of consumers whether they will spend more or save. If consumers choose to save, interest rates will be higher than expected.

When consumers opt to not use their credit cards often during an interest rate hike, they will receive higher rates of return. An interest rate hike is usually complemented by a higher inflation, so consumers may be enticed to spend more if they believe that the purchasing power of a currency will be greatly affected by inflation.

Supply and Demand

An increase in demand for credit will augment interest rates, while a decrease in demand for borrowed money will reduce them. The supply of credit is increased by the demand of money needed to be made available to borrowers.

The credit made available to a country’s economy will decrease as consumers decide to postpone the payment of their expenses. For example, if a large number of consumers decide to delay their monthly credit card payment until next month, they increase the amount of interest that needs to be paid and lower the sum of available credit to a country. This in turn would raise interest rates in the economy and hurt credit card owners in general. Since the Fed wants to hike interest rates three times in 2018, consumer debt will be more expensive and possibly take longer to pay.

If you need to keep your credit card expenses at bay, check out 6 Ways to Choose The Best Credit Card to Pay Off First to be more efficient in paying off your debts.

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