When the Federal Reserve raises interest rates, it doesn’t just make debt more expensive—it often makes it harder to obtain.
The “Cost of Capital”
Banks borrow money themselves to lend to you. When the Fed raises rates, the bank’s “cost of capital” goes up. To maintain their profit margins and offset the higher risk of defaults that come with higher interest rates, banks often become more selective.
Interest Cost Comparison (per $1,000 balance)
| Scenario | Monthly | Annual |
|---|---|---|
| At Previous Rate (7% Prime) | $26.66 | $319.90 |
| At Current Rate (6.75% Prime) | $26.45 | $317.40 |
| Total Change | $-0.21 | $-2.50 |
What to Expect During Rate Hikes
- Higher Credit Score Requirements: A score that might have been approved for a “Premium” card a year ago might now be considered “on the bubble.”
- Lower Initial Credit Limits: Banks may reduce the initial credit limits they offer to new customers to minimize their total exposure.
- Tighter Debt-to-Income (DTI) Ratios: Lenders may become more sensitive to how much existing debt you are carrying compared to your income.
If rates are rising, it is more important than ever to ensure your credit report is clean and your utilization is low before applying for a new card.