For many Americans, inflation has become a significant concern. Prices are rising at the gas pump, grocery stores, and various other places, leading to frustration.
However, a new credit card, especially one with generous rewards and a competitive interest rate, could be a valuable tool in combating inflation. It’s crucial, though, not to undermine its effectiveness by consistently carrying a balance and accruing interest charges. Additionally, selecting a card that aligns with your spending habits is essential for maximizing its benefits.
The impact of inflation
After peaking at 9.1 percent in June 2022, the Consumer Price Index (CPI), a key gauge of inflation encompassing consumer prices for essentials like groceries and fuel, has gradually declined to 3.3 percent as of May 2024, though it remains above the Federal Reserve’s target of 2 percent.
This prolonged period of elevated inflation has eroded Americans’ purchasing power, necessitating more money to purchase goods and services.
Despite some progress in the Federal Reserve’s efforts to curb inflation, immediate relief for consumers may be elusive. Persistent higher prices driven by inflation continue to strain individuals’ savings, leaving them vulnerable to unforeseen expenses and often resorting to high-interest debt to cover these costs.
Inflation impacting credit card debt
In an effort to combat inflation and stabilize the economy, the Federal Reserve has kept the target federal funds rate within a range of 5.25 percent to 5.50 percent, a significant increase from the 0.75 percent to 1.00 percent range observed in June 2022.
When the Fed raises the federal funds rate, it typically affects interest rates across various financial products, including credit cards. This is because the prime rate, which influences credit card interest rates, tends to move in alignment with changes in the federal funds rate. Consequently, an increase in the prime rate usually results in higher interest rates on credit cards.
As of June 2024, the average interest rate on credit cards stands at 20.68 percent, as reported by Bankrate. This marks an increase from the 2022 average of 16.17 percent, leading to higher costs for consumers who carry balances on their credit cards.
How a new credit card can help you fight inflation
Just as inflation erodes the purchasing power of cash, it can also diminish the value of credit card spending. However, credit cards offering robust rewards, bonuses, and benefits can serve as a countermeasure against inflation, particularly those newly introduced to the market.
Rewards such as cash back or points can effectively reduce expenses on everyday purchases. Moreover, the introductory bonuses provided with new rewards cards can offset the impact of rising prices, especially for significant purchases. Additionally, certain credit cards offer perks and benefits that further minimize out-of-pocket costs, particularly beneficial during travel or other specific expenditures.
To maximize the benefits of credit card rewards, it’s essential to pay off the full balance each month. This approach avoids accruing interest charges that can diminish the value gained from credit card rewards over time.
What to consider when picking a credit card
If you’re looking into credit cards that offer rewards to combat inflation, it’s crucial not to select one randomly. Start by analyzing your spending patterns over the past few months to identify a card that aligns with your everyday expenses.
For example, if groceries are a significant expense, consider a credit card offering substantial cash back on grocery purchases. Alternatively, if you’re frequently traveling, an airline or hotel credit card might provide more rewarding benefits.
Typically, rewards cards fall into three main categories — cash back, points, and miles — offering rewards on eligible purchases across various spending categories.
In addition to evaluating the rewards structure, look for cards that feature a 0 percent introductory APR for at least 12 to 15 months to maximize their value (the top-tier cards may offer up to 21 months). However, be diligent about paying off your balance before the introductory APR period expires to avoid the standard interest rate kicking in.
Furthermore, don’t overlook the variable APR that applies after the introductory period. Opting for a card with a comparatively low variable APR can potentially save you significant money on interest charges over the long term.
In Conclusion
Inflation has led to increased prices across the board, affecting everyday items like milk and luxury goods such as Maseratis. To navigate these challenges, many Americans are turning to new credit cards, especially those offering generous rewards and a 0 percent introductory APR, to offset the impact of inflation.
Before embarking on your search for the ideal rewards credit card to bolster your defense against inflation, take time to evaluate whether cash back, points, or miles will provide the greatest value for your spending habits. Additionally, aim to maintain low balances to avoid accruing interest charges that could undermine your efforts.