As we head into 2026, interest rates and their impact on credit card holders remain a major concern for consumers.
In 2025, the Federal Reserve shifted monetary policy by cutting its benchmark interest rate several times. After a period of historically high rates, the Fed lowered the federal funds rate to a target range of 3.50 percent to 3.75 percent by the December 2025 meeting. This marked the third cut of the year.
Even with these cuts, credit card interest rates remain high. According to the most recent data from the Federal Reserve, the average APR for credit card accounts in the third quarter of 2025 was about 21.39 percent, up slightly from earlier in the year. For accounts that are actually accruing interest, the average APR was even higher at 22.83 percent.
These figures are well above typical personal loan and mortgage rates, and much higher than the average credit card APRs seen earlier in this decade. Because most credit cards use a variable interest rate tied to market benchmarks, the ongoing lag in lower card APRs means many consumers continue to pay elevated interest even as broader benchmark rates fall.
If you’re like many people, you may be wondering how the Federal Reserve affects your credit card rates and what you can do to stay within budget. Below, we explain how this system works and ways to reduce the impact of high credit card interest on your finances.
The Role of the Federal Reserve
The Federal Reserve’s key responsibilities include maintaining price stability, supporting employment, and ensuring the strength of the financial system. One of its most important tools is setting the federal funds rate, which is the rate at which banks lend to one another overnight.
Changes in the federal funds rate influence borrowing costs across the economy, including mortgages, auto loans, and credit cards. Banks use the federal funds rate as the basis for setting the prime rate, which in turn influences consumer lending products.
As of late December 2025, the federal funds rate target range is 3.50 percent to 3.75 percent. This is down from the much higher levels seen in prior years when the Fed was focused on reducing high inflation.
The prime rate — which many banks use as a base rate for setting credit card APRs — tends to move in tandem with changes in the federal funds rate. The prime rate most recently stood at 6.75 percent in late 2025, down from 7.00 percent and 7.25 percent earlier in the year as the Fed cut rates.
However, because issuers often lag in adjusting card APRs after rate reductions, many cardholders have not yet seen lower interest rates on their existing variable-rate accounts.
What Influences Credit Card Rates?
Various factors determine credit card rates, including the borrower's credit score, the issuer's risk evaluation, and the card type.
- Credit Score: Your credit score is one of the most critical factors determining your credit card interest rate. Generally speaking, the higher your credit score, the better the rate. Credit card issuers use your score to assess your risk as a borrower and will set your rates accordingly.
- Issuer's Risk Evaluation: The issuer's risk evaluation is another factor in determining your rate. Credit card companies evaluate their own risk when offering cards to prospective customers. This evaluation utilizes various criteria, such as income and other debt obligations. Typically, people who demonstrate higher risk levels will get higher interest rates.
- Credit Card Type: The card you choose also affects your rate. Rewards cards, for example, typically come with higher rates due to the additional benefits they offer. On the other hand, cards with no rewards may offer lower rates.
- Market Rates: The prevailing market rate can influence your offered rate. Banks and other financial institutions use the federal funds rate as a foundation to create their prime rate. The prime rate is the interest rate for customers who deserve the lowest rates (often due to the above factors). However, credit card rates are almost always several points higher than the prime rate. So, if you have an APR of 18%, this includes the prime rate plus several additional points of interest.
Financial institutions increase their prime rates when the Fed raises their rates to keep pace. As a result, customers will pay higher rates than they normally would on their credit cards.
Minimizing the Impact of Increasing Rates
Even slight increases in credit card rates can cause your unpaid balance to balloon. Therefore it's essential to stay on top of it and minimize credit card debt in any way you can.
- Pay off high-interest rates first. It's best to prioritize paying off your highest interest-rate cards first. Doing so will help minimize their impact on your finances.
- Transfer your balance to a 0% APR credit card. If you have a good credit score, consider transferring your balance from one credit card to another from a different bank. They will usually allot you a specific amount of time (12 to 18 months) to pay off the debt without accruing any interest.
- Switch to cash or a debit card. One way to reduce your credit card debt is to stop using your credit card in the first place. Instead, use a debit card or cash to avoid any interest.
- Decrease your expenses. If you have to go without some of the luxuries of your current lifestyle to pay off your credit card debt, do it. Decrease your budget and stay within it to increase your monthly savings and put more towards paying off your debt.
- Debt consolidation loan. Check with your local bank or credit union to discuss a debt consolidation loan. Consolidating your debt is especially useful if you have several outstanding balances. They will combine all your debts into one low-interest personal loan, making payments easier with reduced interest.
Takeaway
Nobody likes increased credit card rates; for some, even a slight increase can send them into a debt spiral if you're not careful. Therefore, following these steps and doing everything possible to pay down or pay off your debt is essential. If you're worried about increasing credit card rates, speak to your financial representative about other options.