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For many Americans, inflation is a four-letter word. We’re cursing as we pay more at the gas pump, the grocery store and a lot of other places.
However, a new credit card — especially one offering hefty rewards and an attractive interest rate — could be a weapon in the fight against inflation. Just be sure you don’t diminish the power of that weapon by regularly carrying a balance on your credit card and paying interest. Also, remember to choose a card that fits your spending patterns.
Inflation keeps eating away at our purchasing power. In fact, inflation has soared to heights we haven’t seen in almost 40 years.
The inflation rate, which takes into account consumer prices for everything from groceries to gas, reached 8.3 percent in April, according to the U.S. Bureau of Labor Statistics. That compares with 8.5 percent the previous month and 4.2 percent in April 2021. Before the pandemic, in April 2019, the inflation rate sat at 2.1 percent.
Translation: In the past few years, Americans’ purchasing power has eroded, meaning it takes more of our money to buy goods and services.
The good news is that experts are forecasting a decline in inflation. For instance, Fannie Mae, a government-sponsored venture that guarantees mortgages, foresees the inflation rate averaging 5.5 percent in the fourth quarter of 2022. Meanwhile, the Federal Reserve predicts the inflation rate will fall to 4.3 percent by the end of 2022 and 2.8 percent by the end of 2023.
Changes in prices for select goods and services, April 2021-April 2022
|Select goods and services||Price change|
|Source: U.S. Bureau of Labor Statistics|
How a new credit card can help you fight inflation
Just as inflation nibbles away at the spending power of cash, it also can nibble away at the spending power of credit cards. However, credit cards with robust rewards, bonuses and benefits can help you fight inflation. This is especially true for a new credit card.
Credit card rewards such as cash back or points can save you money on your everyday spending. On top of that, the sign-up bonus you receive when opening a new rewards card can help cushion the blow of rising prices, especially if you’re planning a large purchase. Some credit cards also supply perks and benefits that can save you yet more out-of-pocket costs — for example, when you travel.
Of course, you can squeeze even more out of credit card rewards if you pay off your full balance every month. By doing so, you can avoid interest charges that drain value from credit card rewards.
What to consider when picking a credit card
If you’re considering credit cards that deliver inflation-fighting rewards, don’t randomly pick a card. Instead, examine your spending over the past few months so you can find a card that rewards your everyday expenses.
For instance, you may benefit from a credit card that provides an attractive amount of cash back on grocery purchases. Or maybe you’re traveling a lot now and would find an airline or hotel credit card more rewarding.
Rewards cards come in three categories: cash back, points and miles. These cards provide rewards on eligible purchases.
Aside from checking out the rewards themselves, be sure to explore cards that are extending an introductory offer of 0 percent APR for, say, 12 or 15 months. If you do take advantage of one of these cards, don’t forget to pay off the balances covered by the intro offer before the 0 percent APR ends. Otherwise, the normal interest rate for the card will take effect.
Also, remember not to overlook the APR that the card issuer will charge outside the intro period. Choosing a card with a relatively low APR could save some serious dough when it comes to long-term interest charges.
Inflation impacting credit card debt
In an effort to curb inflation and cool off the economy, the Federal Reserve has been hiking the federal funds rate. This is the interest rate that banks charge when they lend to one another. Boosts in this rate can cause the interest rates for loans and credit cards to go up.
When the Fed bumps up the federal funds rate, that action tends to trickle down to interest rates for credit cards. How? The closely monitored prime rate, used to set interest rates for credit cards, typically moves in tandem with the federal funds rate. In other words, if the prime rate climbs, the interest rates for credit cards are likely to climb as well.
As of June 1, 2022, the typical variable interest rate for credit cards stood at 16.61 percent. Thus far in 2022, the variable rate has continually inched up, generally making it more expensive to carry a balance on a credit card.
Amid the current inflationary environment, Americans are opening more credit card accounts. During the first quarter of 2022, the number of new accounts totaled 229 million. Meanwhile, overall credit card balances declined $15 billion in the first quarter but remained $71 billion higher than they were during the same period last year. In other words, household debt is rising.
The bottom line
Inflation is triggering higher prices for everything from milk to Maseratis. As Americans continue to cope with inflation, some are finding that a new credit card — particularly one offering lucrative rewards and a 0 percent introductory APR — can help blunt the effects of inflation.
Before you start shopping for the best rewards card to add to your inflation-fighting arsenal, consider whether cash back, points or miles will bring the most bang for your buck. Also, strive to keep your balances as low as possible, so credit card interest charges don’t work against you.