Credit card holders should brace for more interest rate shock in 2023.

Greg McBride, CFA and chief financial analyst at Bankrate, predicts that as the Federal Reserve continues to raise interest rates, the average interest rate for a credit card will climb to 20.5 percent this year. As of Dec. 28, 2022, the average rate was close to that mark — 19.6 percent, according to Bankrate data. By comparison, the average credit card interest rate stood at around 16.3 percent at the outset of 2022.

“Credit card rates reached record highs in 2022, and there is still more to come in 2023,” McBride says. “An active Fed means cardholders with balances will continue to see interest costs rising. The important takeaway for current cardholders is that another 1 percentage point in rate hikes by the Fed means your rate will move up by 1 percentage point.”

However, there is a bit of good news: McBride says the average rate available to new cardholders will rise less than the overall projected increase in 2023 due to factors such as the introduction of new offers and the retirement of old cards.

  • Average credit card interest rates sat near 16.3% at the start of 2022, jumping to 19.6% at year’s close
  • Card interest rates will continue to rise in 2023 after record highs in 2022

What happened to credit card interest rates in 2022

Credit card interest rates jumped along with the Fed’s interest rate hikes in 2022.

The lowest average credit card rate in 2022 was 16.28 percent from late January through mid-February, according to Bankrate data. But in July, the average rate crossed the 17 percent mark — 17.01 percent, to be exact. Just two months later, the average rate broke the 18 percent barrier (18.03 percent). And early November ushered in an average rate above 19 percent (19.04 percent).

The year closed with the highest average rate of the year: 19.6 percent as of Dec. 28, 2022.

Interest rates rose throughout 2022, and credit card balances kept rising “because inflation has stretched and strained household budgets,” McBride says.

“High rates alone will not be a deterrent from using credit cards as long as inflation is elevated and household budgets are so tight that many consumers are putting purchases on their credit cards — because they have to, not because they want to.”

— Greg McBride, CFABankrate chief financial analyst

Popularity of buy now, pay later may take off

As credit card interest rates keep surging, even more consumers may turn to buy now, pay later (BNPL) as an alternative. BNPL lets customers make regular interest-free payments on a purchase, such as a TV or a sofa, during a set period of time.

David Shipper, who focuses on credit and debit cards as a strategic adviser at advisory firm Aite-Novarica foresees “a continued shift toward BNPL as consumers avoid credit card interest rates and want to take advantage of the fixed payments and terms of BNPL loans.”

Research firm Insider Intelligence predicts the number of BNPL users in the U.S. will increase from 79 million in 2022 to 88.2 million in 2023, representing a one-year jump of 11.7 percent.

Next steps for consumers

Although consumers can do nothing to stop card issuers from raising interest rates, they can make moves to help ensure credit card interest won’t eat up too much of their budgets. Here are four recommendations.

Track interest rates

If any of your credit cards come with a variable rate, meaning the APR goes up or down in response to actions by the Fed, Ligia Vado, senior economist at the Credit Union National Association, advises monitoring your card’s rate changes.

“In the current environment of rising interest rates and increased uncertainty, consumers need to make sure increasing interest rates don’t catch them off guard with an unnecessary and heavy financial burden,” Vado says.

Pay down credit card debt

McBride suggests “aggressively” eliminating credit card debt to ease the impact of higher interest rates and perhaps coupling that effort with a 0 percent balance transfer offer, which provides an introductory 0 percent APR for 12 to 21 months. This type of offer enables you to transfer higher-interest credit card debt to a balance transfer credit card with the goal of getting rid of that debt before the 0 percent rate expires.

Avoid unnecessary purchases

Unless you can pay the balance in full at the end of the month to avoid interest charges, McBride recommends not adding more purchases to a credit card.

“Credit card interest rates have not been this high in over 10 years, so many consumers do not realize how higher interest rates will impact them,” Shipper adds. “The best advice is nothing new — spend within your means and keep your credit card balances as low as possible.”

Shop around for 0% intro APR offers

You shop around when you’re looking for a house or car, don’t you? Experts suggest doing the same with new credit cards.

“Credit card rates go up faster when interest rates are rising, then they come down when interest rates fall,” McBride says. “The Federal Reserve isn’t projecting they’ll begin cutting interest rates before 2024, so for cardholders, your best hope for relief from high rates is to shop around for a better deal. Grab a 0 percent or other low-rate balance transfer offer in order to turbocharge your debt repayment efforts and get your credit card debt paid off once and for all.”