What Inflation Could Mean for Your Credit Card Debt

In February 2022, the Consumer Price Index (a metric for the price of all goods and services) was reported as having risen 7.9 percent over the last 12 months. This means, on average, nearly everything costs about 8 percent more than it did last year.

If you regularly use credit cards or already have some credit card debt, then the rise of inflation may have you worried. Here’s what you need to know.

What Inflation Does Not Affect

The first thing to note is that rising prices do not directly affect your credit score or balance. Your credit score is based on a variety of factors within your specific life situation, including credit history. So as long as your payments have been on time and meet the minimum monthly amount, then your score would most likely be unchanged.

The second is that it will not change the value of your existing balance. Creditors cannot adjust debt levels to the current value of the dollar. They instead charge high levels of interest that are intended to be inclusive of these changes in inflation.

How the Federal Reserve May Increase Your Interest Rate

One way that inflation will indirectly impact your credit card is through Federal Interest rate hikes.

It’s the job of the Federal Reserve to keep inflation to a modest level. Whenever prices start to change above their target 2 percent increase, the Fed will meet and discuss the use of potentially increasing the federal interest rate. This is the rate that is used to lend money to private banks and financial institutions. This federal rate is also tied to an internal figure used by banks known as the prime rate.

In terms of credit cards, most interest rates are what’s called “variable”. This means that when the prime rate changes, the rate used to charge interest on your revolving balance will also increase. In other words, the higher the Fed increases its rate, the more interest you can expect to pay over time.

In 2022, Morgan Stanley expects Fed to hike rates six times throughout the year. Therefore, if you’ve got existing credit card debt, you may want to make it a priority to reduce it before the rate gets much higher.

Future Charges Will Go Up

Even if you’re not already carrying a credit card balance, there is a chance that inflation could result in you having one eventually.

When the price of everything increases, generally wages stay stagnant. This creates a problem for most consumers because they’re not able to afford the same things that they used to.

For example, think about filling your car. Energy costs have skyrocketed as part of this surge in inflation, and someone who used to fill up their tank every week for $30 is now likely paying around $50. That means they now have less money to spend on other necessities like rent, groceries, or utilities. For families that are already cash-strapped, these increases might push them off the edge and into debt.

What You Can Do About Inflation

There’s no fighting inflation. The best thing any of us can do is to try our best to manage it.

This starts with making a budget. Take a look at your income for the month and plan out your expenses. Make sure they fit within your means and put off any major purchases wherever possible.

You can also use a balance transfer credit card to take on some of your credit card debt at a temporarily lower interest rate.

Also, prioritize the creation of an emergency fund. This is the money that can serve as a cushion between your regular expenditures. Aim to have at least 3 to 6 months’ worth of expenses.