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credit & debt

How Your Credit Card’s Rate Is Set

With the rise of short-term rates, APRs are starting to increase, too.

Now that the Federal Reserve has begun to raise short-term interest rates, most credit card holders are seeing the annual percentage rate on their cards tick up, too. Most credit cards come with a variable rate tied to an index, such as the prime rate. Each time the Fed hikes rates, the index typically follows. For example, in response to the Fed's rate increase in December, the prime rate rose from 3.25% to 3.5%. [Kiplinger expects two more quarter-point increases in 2016.

To determine a variable APR, card issuers add a set number of percentage points, called a margin, to the index rate. (Check your card's account agreement and monthly statement for information on the index, margin and current APR.) The Chase Freedom card, for example, charges customers the prime rate plus 10.74 to 19.74 points (depending on your credit history), for a recent APR of 14.24% to 23.24%. As the index rises, card issuers apply the new rate to both outstanding balances and new charges, and they don't have to notify you of the bump.

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For now, your minimum payment probably won't increase by more than a few dollars each time the rate goes up, unless you're carrying a hefty load of high-rate debt. But paying down credit card debt as quickly as possible is always a smart move.

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Fixed-rate cards, which are rare these days, are less sensitive to rate hikes. An issuer may raise the rate on a fixed-rate card, but it must give you at least 45 days' notice, and the new rate may apply only to new purchases. Issuers aren’t likely to increase fixed rates for current customers anytime soon, says Nick Clements, cofounder of financial education site MagnifyMoney.com. (For more credit card protections, see How Your Credit Card Can Protect You.)

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