Credit card interest rates began a gradual climb in 2021, and that will likely continue in 2022.

The average rate on credit card accounts that charged interest dipped below 16 percent in April, then edged up to 16.32 percent by year end, according to Federal Reserve data. Bankrate data shows the average interest rate for variable-rate credit cards was 16.15 percent in 2021.

As the Federal Reserve keeps an eye on the economy, credit cardholders should keep an eye on interest rates. The Fed is expected to start hiking its target interest rate by spring, and consumers will see a corresponding rise in interest rates for credit cards.

“If the Fed raises interest rates by a quarter of a percentage point, you’ll see that quarter-point passed along within one to two credit card statement cycles,” said Greg McBride, CFA and chief financial analyst at Bankrate. “My forecast is the Fed will raise rates twice next year and could easily do more.”

McBride predicts the average credit card rate will be up to 16.9 percent by the end of 2022.

Credit card rates likely to climb twice in 2022

Two interest rate increases in the first half of the year are likely, McBride said, with the first in the spring and the second “by July probably. But I expect inflation numbers will be moderating it by then in a significant way, which takes some of the pressure off.”

Of course, an unexpected crisis could cause the Fed to change course. “Every year there’s something we didn’t see coming,” McBride said. Omicron or some other variation of COVID-19 is one possibility. “But it could also be a geopolitical crisis, a sharp stock market correction, turmoil in another area of financial markets or asset prices—or something else entirely.”

The Fed tends to overestimate how active it’s going to be in terms of raising interest rates, McBride said. “So, I’m accounting for that with a forecast of two rate hikes. It’s very plausible that they could do three or four.”

Dawit Kebede, senior economist at the Credit Union National Association, says the projected spike in credit card interest rates is partly driven by the Fed’s reduction of purchases of Treasuries and mortgage-backed securities, designed to keep interest rates at their current levels. Phasing out that activity “will slowly increase the cost of borrowing,” Kebede said.

Time to pay down credit card debt

What does that mean for credit cards? “The bottom line for cardholders is that credit card debt is going to get more expensive,” McBride said.

Those carrying credit card debt can save money by paying it off in the first half of the year. “It pays to put some emphasis on getting that debt paid down as quickly as possible,” McBride said.

If you carry card debt, he suggests looking at 0 percent card or low-rate balance transfer card. A card with an introductory period of 12 to 18 months at 0 percent can insulate you from the higher rates next year, McBride said. “It also gives you this runway where you don’t have any interest charges. Every dollar you throw at this thing will be knocking down the balance.”

Higher APRs for weaker credit

Last year, McBride predicted card issuers would increase rates offered to people with weaker credit who were applying for new credit cards while lowering rates for consumers with strong credit.

“That’s exactly what we saw play out, and I think we’ll see more of that in 2022,” McBride said.

But that will not affect existing cardholders. “The only thing existing cardholders need to worry about is Fed rate hikes—that’s what will push their rate up,” McBride said. “In terms of offers in the marketplace, those who have weaker credit are likely to see less attractive rates, as issuers adjust margins.”

Will interest rate hike push BNPL?

David Shipper, strategic adviser for retail banking and payments at consulting firm Aite-Novarica Group, predicts an increase of 0.25 percent to 0.5 percent in credit card interest rates in 2022 “will go unnoticed by most consumers.”

But with consumer debt creeping up, including a $17 billion jump in credit card balances in the third quarter of 2021, and government stimulus payments and tax credits drying up, some consumers may struggle to pay their credit card bills. Higher interest rates could intensify that.

“If consumers begin missing payments, card issuers will likely cut back on special rate offers and increase interest rates to help offset credit losses,” Shipper said.

“One of the things we know is that consumers are not always aware of their credit card interest rate,” said John Cabell, director of banking and payments intelligence at J.D. Power. “It pays to look at what your interest rate is.”

A noticeable increase in credit card interest rates could push people with weaker credit toward emerging low- or no-interest “buy now, pay later” (BNPL) options, Cabell said.

BNPL services enable shoppers to make purchases and spread out payments over, say, four months. If the balance is paid in full and on time, a consumer can potentially steer clear of interest charges and fees. Some payment services and credit card companies, such as PayPal and Mastercard, now offer BNPL capabilities.

The bottom line

“The bottom line is rates are going up,” McBride says. “If you’ve got credit card debt, you’re on the cutting edge of those higher rates. So pay down that debt now because it’s only going to get costlier in 2022.”