Can A New Credit Card Fight Against Inflation?

For many Americans, inflation has become a dreaded issue. We grumble as prices rise at the gas pump, grocery store, and beyond.

However, a new credit card—especially one with substantial rewards and a competitive interest rate—could serve as a valuable tool in combating inflation. Just be cautious not to weaken its effectiveness by regularly carrying a balance and accruing interest. Additionally, select a card that aligns with your spending habits to maximize its benefits.

After climbing steadily for over a year, reaching 9.1 percent in June 2022, the Consumer Price Index (CPI)—a key measure of inflation encompassing consumer costs from groceries to fuel—has since eased to 3.3 percent as of May 2024, although still above the Federal Reserve’s typical 2 percent target.

In practical terms, this means Americans have experienced a decline in purchasing power over recent years, necessitating more money to purchase everyday goods and services.

Despite some progress in the Federal Reserve’s efforts to curb inflation, immediate relief for consumers may not be forthcoming. Persistently elevated prices driven by inflation continue to erode savings, leaving individuals vulnerable to unexpected expenses and potentially resorting to high-interest debt to cover them.

To combat inflation and moderate economic growth, the Federal Reserve has maintained the target federal funds rate in a range of 5.25 percent to 5.50 percent, a significant increase from its earlier range of 0.75 percent to 1.00 percent as of June 2022.

When the Fed raises the federal funds rate, it typically has a ripple effect on credit card interest rates. This is because the prime rate, which influences credit card interest rates, generally moves in sync with the federal funds rate. In essence, an increase in the prime rate often results in higher interest rates on credit cards.

As of June 2024, the average interest rate on credit cards is 20.68 percent, according to Bankrate. This marks an increase from an average of 16.17 percent observed in 2022. Consequently, carrying a balance on credit cards has become more costly for many consumers.

Just as inflation diminishes the purchasing power of cash, it can also impact the value of credit card spending. However, credit cards offering substantial rewards, bonuses, and benefits can serve as a tool to combat inflation, particularly newer credit cards.

Credit card rewards like cash back or points provide savings on everyday expenses. Additionally, the introductory bonus received when opening a new rewards card can offset the impact of rising prices, particularly for significant purchases. Some credit cards also offer perks and benefits that reduce additional costs, such as those incurred during travel.

To maximize credit card rewards, it’s advisable to pay off the full balance each month. This approach avoids interest charges that can diminish the value of credit card rewards over time.

When selecting a credit card to combat inflation with rewards, it’s essential to choose one that aligns with your spending habits rather than picking randomly.

Begin by reviewing your recent expenditures to identify a card that rewards your everyday purchases effectively. For example, if you spend heavily on groceries, a card offering generous cash back on grocery purchases could be advantageous. Alternatively, if you frequently travel, consider an airline or hotel credit card that offers rewards tailored to your travel expenses.

Rewards cards generally fall into three main categories: cash back, points, and miles, each offering rewards on eligible purchases.

In addition to evaluating the rewards structure, look for cards that provide a 0 percent introductory APR for at least 12 to 15 months to maximize their value (some top cards extend this period up to 21 months). However, it’s crucial to pay off your balance before this introductory period expires to avoid being subject to the regular interest rate of the card.

Furthermore, consider the ongoing APR outside the introductory period. Opting for a card with a relatively low variable APR can result in significant savings on long-term interest charges.

As inflation drives up prices across the board, Americans are exploring new ways to mitigate its impact. For many, a new credit card with attractive rewards and a 0 percent introductory APR is proving to be a valuable tool.

Before diving into the search for the ideal rewards credit card to combat inflation, it’s crucial to assess whether cash back, points, or miles will provide the greatest benefits based on your spending patterns. Additionally, maintaining low balances on your card is essential to avoid interest charges that could undermine your efforts to offset inflation.