Fed hike or no Fed hike, your credit card debt is expensive. Here’s how to pay it back.
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 peakthe Federal Reserve is 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 costly.
The true cost of credit card debt over time
If you have a balance of $5,000 left on your credit card from month to month and your interest rate is 16%, you will be spending $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 ripping off the bandage and adding up the numbers to see how much you owe,” said Akeiva Ellis, certified financial planner and founder of The Bemused, a financial education brand for young adults. “But if you’re able to get to that point, it’s really about coming up with a plan. Don’t let your debt overwhelm you. The sooner you can face the numbers and come up with a plan to pay it off, the sooner it will you will be easy going to breathe.”
How to 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.) “There may be times when you applied for the account you have, your credit score was lower,” said Bruce McClary, senior vice president of communications. at the National Foundation for Credit Counseling. 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.
- REVIEW YOUR BUDGET: The more money you can apply to 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 don’t live in a vacuum,” McClary said. “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 once. 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 their most expensive debt,” Ellis said. “So that’s something that I usually encourage people to focus on first.”
This article was provided to The Associated Press by personal finance website NerdWallet. Sara Rathner is a writer at NerdWallet.