Rising interest rates mean it’s time to eliminate credit card debt
Credit card debt can be difficult to manage, even at the best of times, but increasingly high interest rates add to that challenge.
On Wednesday, the Federal Reserve announced a 0.75% increase in the federal funds rate – its largest increase in nearly 30 years. Increases in this rate tend to make borrowing more expensive, which means maintaining a balance on your credit card can become more expensive.
But by creating a plan to pay off your credit cards in the coming months, you can save money on interest. Whether you’re tackling debts one at a time or consolidating under a fixed rate product like a personal loan, there are strategies that can help.
Why You Should Prioritize Credit Card Debt
Most credit cards have a variable interest rate, which means the rate can go up and down depending on a few factors, including market conditions. While fixed rate products like personal loans may not see as much change in interest rates when the fed funds rate rises, variable rate products like credit cards likely will.
Higher rates on credit cards mean people will start paying more for a balance, at a time when household budgets are already stretched due to rising consumer costs, says property expert Jeff Arevalo. -be a financier at the non-profit credit counseling agency GreenPath.
It can also mean that progress on other important goals, like saving for a house, is being sidelined as more people focus on making ends meet. However, Arevalo says there is still plenty of time to get ahead of a rising rate environment.
“When [the Federal Reserve increases] interest rates, it can take a month or two for it to have a full impact on credit cards, so ideally consumers can be proactive,” he says. “If you know these changes are coming and you’re carrying these higher credit card balances, the key is not to be paralyzed by fear.”
Tackling Your Credit Card Debt: First Steps
Brittany Davis, a certified financial counselor who works with people struggling with credit card debt, says the first steps to getting out of debt can be the hardest for clients.
First, you have to face the extent of your debt. Davis advises keeping track of your balance, minimum monthly payment, and interest rate for each credit card to get an overview of what you owe.
Then, she says, you can use an online tool, like a debt repayment calculator, to plug in the numbers and compare different strategies. Two popular winning strategies are the avalanche and snowball methods. With the avalanche method, you start with the debt with the highest interest rate and work your way down, which generally saves you time and money on interest. With the snowball method, you start with the smallest debt and progress gradually, which builds motivation.
Another advice from Davis: Stop using your credit cards for now, which means looking at what sites and apps they’re already linked to. While you may remember not to use a credit card when you make a big purchase, it’s the small, recurring expenses like monthly subscriptions that sneak up on you.
“Money moves fast now,” Davis says. “It’s easy to forget where our maps are linked. If you’re really serious about not using a credit card when paying, be sure to switch those accounts to a debit card.
Other Strategies to Fight Credit Card Debt
If your debt feels too overwhelming to deal with the avalanche or snowball method, there are other strategies that can help lighten the load.
Negotiate with your creditors. It never hurts to phone your creditors and ask what they can do for you, Davis says, especially if you already have a relationship with them. Your bank or credit union may provide a lower rate, waive fees, or provide a higher credit limit, which may reduce your use of credit and help you access low-interest financing at home. ‘coming.
Beware of the effects of what you ask. For example, extending a higher credit limit may require high credit demand, which may temporarily knock a few points off your credit score.
Consolidate your debts. If you have high-interest debt on multiple credit cards, consolidating is a smart move, especially if you qualify for a lower rate than you’re getting on your current debt.
At 0% balance transfer card is one of the best ways to consolidate your debt if you have good or excellent credit (FICO score of 690 or higher). These cards charge 0% interest for a promotional period – sometimes up to 21 months – so if you transfer your debts to the card and pay it off during this period, you won’t pay any interest. Some cards charge a balance transfer fee, usually 3% to 5% of the total transferred.
If you are not eligible for a balance transfer card, a debt consolidation loan is another good option. These loans are available to borrowers from all credit backgrounds, but they charge interest, which is fixed over the term of the loan, so you’ll make the same payment each month.
Contact a credit counseling agency. Finally, you don’t have to go it alone. Arevalo recommends finding a reputable, nonprofit credit counseling agency that can help you budget, negotiate with creditors, or get into a debt management plan.
A debt management plan typically consolidates credit card debt at a lower interest rate and gives you a three to five year repayment plan. You may incur a start-up fee and monthly fee for using this service.
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Jackie Veling writes for NerdWallet. Email: [email protected]
The article Rising Interest Rates Means It’s Time to Eliminate Credit Card Debt originally appeared on NerdWallet.