Stay Ahead of the Game: Don't Let the Federal Reserve's Rate Increase Take a Toll on Your Wallet
- Author: Jenny Wolff
- Posted: 2024-05-17
Credit card debt is already at a record high, and the latest interest rate increase is expected to raise the Annual Percentage Rate (APR) on credit cards by 0.25%.
This means that if your current interest rate is 20.4%, which is the average according to Bankrate, it may increase to 20.65%.
For those who carry a balance on their credit card from month to month, the increase in APR could result in additional interest charges and a longer time to pay off the debt.
For example, if you have a $4,000 credit balance and your interest rate is 20%, it would take you just under five years to pay off your debt and cost you around $2,200 in interest if you only make a fixed payment of $110 per month. However, if your APR increases by a percentage point, it could take you two months longer to pay off your balance and cost an additional $215.
To reduce credit card debt, one strategy is to sign up for a zero percent interest or low interest balance transfer promotion offered by a credit card company. This allows you to transfer your high-interest credit card debt to a low-interest credit card, and some companies offer promotions up to 21 months. However, banks may charge a flat fee for balance transfers, such as 3% of the balance transferred.
Another strategy is to take a low-rate personal loan as a form of consolidation (click here). A debt management plan offered by a reputable nonprofit credit counseling agency can also help to reduce credit card debt.
If you are struggling to pay off your credit card debt, it may be helpful to increase your payments above the minimum amount due. Financial educators suggest paying at least $10 above the minimum payment of your credit card with the highest interest rate or paying 10% more than the minimum payment per month.
The "debt snowball" method is another way to tackle debt. This involves paying off smaller debts first, which can build momentum and good habits, and then using the money previously allocated to pay off the smaller debts to pay off larger debts. NerdWallet offers a calculator to use this method.
Lastly, the Consumer Financial Protection Bureau recommends using cash for purchases under $20 to avoid overspending on your credit card.
In summary, the recent Federal Reserve rate hike may increase interest rates on credit cards and loans, making it more difficult for those with credit card debt to pay off their balances. However, there are strategies such as balance transfer promotions, low-rate personal loans, debt management plans, and debt payment methods such as increasing payments and the debt snowball method that can help to reduce credit card debt.
