The Federal Reserve has been on an inflation reduction campaign for about 19 months, influencing higher interest rates across the economy. The interest rate that could be affecting the greatest share of households is costly, and one they might have overlooked.
Ask someone what their mortgage rate is and they’ll probably be able to tell you. Ask them for the interest rate on one of their credit cards and prepare for a blank stare. But as of the second quarter, we collectively carry more than $1 trillion in credit card debt across some 578 million credit card accounts, according to data from the New York Fed. And the share of American households carrying a credit card balance — about 47%, according to an early 2023 NerdWallet analysis — surpasses that of mortgages (40%) and auto loans (41%).
Average interest rates charged on credit card accounts have risen from just over 16% in February 2022, before the Fed began raising rates, to just over 22% as of May 2023. And if you carry a balance from one month to the next, this quiet increase could be costing you hundreds or even thousands of dollars.
Your credit card interest rate can be easy to miss
Each month, I log into my credit card accounts, scan the charges quickly to ensure I’m the one who actually made them, then make a payment. Nine times out of 10, I pay the full balance. I don’t spend a lot of time on this task, and I don’t look for the interest rate. I just don’t. However, in the interest of this article, I went looking.
It took me about four minutes to track it down — not bad, but it certainly wasn’t among the many numbers on my account’s home page. Instead, I found it by pulling up my monthly statement and scrolling to the last page. In other words, if someone isn’t actively looking for the interest rate, they’re unlikely to stumble upon it and unlikely to know what they’re being charged.
Also see: Personal-loan rates are half credit-card APRs. Is now the time to consolidate?
A few percentage points can mean hundreds in interest
If you’re not paying off your credit card balance each month, you’re likely paying interest. I say this matter-of-factly, not to scold. Carrying credit card debt is sometimes necessary, and even long after it’s necessary, it can be a hard habit to break. That said, it’s costly.
There are many methods for paying off a credit card. Let’s look at a few options, and how a small hike in interest changes the costs.
Related: Credit-card debt hits $1 trillion — that milestone comes at a very tricky time
A 3-year payoff plan
Let’s assume you have $10,000 on a credit card, and have vowed to prioritize paying it off so you’re not making additional purchases. You’ve made a plan to pay off the debt in three years and used a loan calculator to determine the payments needed to achieve that. If interest were 16%, the monthly payments would be about $352 and you’d pay $2,687 in interest over that three-year period. If you were instead charged 22% interest, the monthly payments would be about $30 more and you’d pay about $1,000 more in interest over the period.
Three-year credit card payoff
Paying off $10,000 in three years of equal payments at 16% vs. 22% interest:
| Interest rate | Monthly payments | Total interest paid |
| 16% | $352 | $2,687 |
| 22% | $383 | $3,778 |
Note: For illustrative purposes, all payment and interest calculations in this article assume the interest rate is static throughout the repayment period.
Plus: A Republican senator wants to limit credit-card APRs to 18%, but these credit cards are already capped that rate
A $300 monthly payment plan
Maybe those payments are too steep, but you know you can make a consistent $300 monthly payment.
In that case, paying 16% interest on a $10,000 balance would take 3 years and 9 months to pay off, and cost $3,366 in interest charges. If you were paying 22%, it would take 4 years and 5 months, and cost about $2,300 more in interest.
$300 payment credit card payoff
Paying off $10,000 in equal $300 payments at 16% vs. 22% interest:
| Interest rate | Total interest paid | Time to payoff |
| 16% | $3,366 | 3 yrs., 9 mos. |
| 22% | $5,673 | 4 yrs., 5 mos. |
Minimum payments only
Generally, minimum payments are set at a portion of your balance (2%-3%) or a flat fee (typically $20-$30), whichever is greater. And while making only the minimum payment will prevent defaulting on the account, it can mean many years of payments and thousands of dollars in interest.
Making minimum payments on a $10,000 balance at 16% interest would take 17 years and 4 months to pay off, and cost $7,835 in interest. If you were paying a rate of 22%, it would take 23 years and 10 months, and $15,322 in interest.
Minimum payments credit card payoff
Paying off $10,000 making only the minimum monthly payments, at 16% vs. 22% interest:
| Interest rate | Total interest paid | Time to payoff |
| 16% | $7,835 | 17 yrs., 4 mos. |
| 22% | $15,322 | 23 yrs., 10 mos. |
Also see: What to do if you’re struggling with your car payments
The bottom line
Credit cards are a useful tool, but interest can be a hefty price to pay for their use. Though the difference between 16% and 22% can easily slip by undetected, it can have a dramatic compounding impact on your ability to get out of credit card debt.
If you’re struggling now to make credit card payments, start by contacting your card issuer. It would rather see you pay than not and may be able to work out a lower interest rate or different due date to help. If the help it provides isn’t enough, consider credit counseling through an accredited nonprofit organization. A credit counselor can help you develop a debt payoff plan and create a budget for longer-term financial security.
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Elizabeth Renter writes for NerdWallet. Email: elizabeth@nerdwallet.com. Twitter: @elizabethrenter.
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