By Sara Rathner
The cost of everything keeps rising. And if you happen to have credit card debt, that’s also likely to get a bit more expensive, thanks to a series of interest rate hikes starting this month.
With inflation at its highest rate since the early 1980s, the Federal Reserve is adjusting interest rates to hopefully stabilize the US economy. In short, the Fed changes the federal funds rate, which changes the prime rate – this is the rate banks charge customers with high credit ratings. Credit card issuers add to the prime rate to set their interest rates. So when the prime rate goes up, so does what you’ll pay when you’re in debt.
Do you have all that? Awesome. Now forget what you just read and pay attention to this part: if you have significant credit card debt, it doesn’t matter what the Fed does. Your credit card debt has always been and will continue to be expensive.
THE REAL COST OF CREDIT CARD DEBT OVER TIME
If you have a balance on your credit card of $5,000 month over month and your interest rate is 16%, you will spend $800 in interest over the course of a year. If your interest rate increases to 16.25%, that translates to just $13 more in interest over a year.
Technically, this means it’s not so much a rate hike as a slight upward slope. But $800 was already a lot, and that’s without considering the fact that you’ll still have to spend extra money that you might not be able to pay back. Bills don’t stop just because you’re in debt.
That’s why squeezing a stress ball while watching the news isn’t helpful in this case. What helps is to face money problems head on.
“The hardest part is tearing off the bandage and adding up the numbers to see how much you owe,” says Akeiva Ellis, certified financial planner and founder of The Bemused, a financial literacy brand for young adults. “But if you’re able to get to that point, it’s really about making a plan. Don’t let your debt overwhelm you. The sooner you can face the numbers and devise a plan to pay it back, the easier you’ll breathe.
HOW YOU CAN PAY LESS INTEREST
¯ SEARCH FOR BETTER DEALS: The average FICO score in the United States rose to 716 in August 2021, and this increase was more frequent for those with lower credit scores. (FICO scores of 690 or higher are considered good credit.) “It may happen that when you applied for the account you have, your credit score was lower”, says Bruce McClary, senior vice president of communications at the National Foundation for Credit Counselling. He recommends checking your credit report and score to see if you’ve moved to a higher score range. If so, you may be able to negotiate a better interest rate on your credit card.
¯ CONSOLIDATE YOUR DEBTS: This higher credit score could also qualify you for a balance transfer credit card with an interest-free promotional period or a low-interest personal loan. These can both give you a high interest reprieve, but note that this depends on what terms you qualify for. And in the case of balance transfer cards, the interest rate will go up as soon as the 0% period ends.
¯ REVISE YOUR BUDGET: The more money you can apply for your monthly credit card payment, the faster you can get out of debt. But that’s easier said than done in a time of rising prices. “Rising interest rates do not live in a vacuum,” said McClary. “Other things keep happening that increase the financial pressures on every American.” If you’re not sure where to start, McClary recommends getting help from a financial advisor or nonprofit credit counseling agency. “Anything people can do to be proactive, they’ll thank themselves later.”
¯ USE A DEBT PAYMENT METHOD: This can help you stay organized and motivated, especially if you have multiple debts at the same time. Ellis suggests the debt avalanche repayment method, where you list your debts from highest to lowest interest rate, make minimum payments on each, and apply any extra money in your budget to the highest debt. raised first. Once you’ve paid that, focus on the next debt on the list, and so on. “For most people, credit card debt is the most expensive debt,” said Ellis. “So that’s something that I usually encourage people to focus on first.”