Focus away from Fed action toward your credit card debt
With inflation at its highest rate since the early
1980s, the Federal Reserve is adjusting interest rates to hopefully restabilize the U.S. economy. In short, the Fed changes the federal funds rate, which alters the prime rate — that’s the rate banks charge customers with high credit ratings. Credit card issuers add onto 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.
Now forget what you just read and pay attention to this part: If you have significant credit card debt, it doesn’t really matter what the Fed is doing. Your credit card debt has always been, and will continue to be, expensive.
True cost over time
If you have a $5,000 balance remaining on your credit card from month to month, and your interest rate is 16 percent, you’ll spend $800 in interest over the course of a year. If your interest rate increases to 16.25 percent, that translates to only an extra $13 in interest over a year.
Technically, that means it’s not so much a rate hike as it is a gentle uphill slope. But $800 was already a lot, and that’s without accounting for the fact that you’ll still need to spend additional money you might not be able to pay back.
How to pay less interest
■ Shop around for better deals: The average U.S. FICO score increased to 716 by August 2021, and that increase was more prevalent 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 that you have, your credit score was lower,” says Bruce Mcclary, senior vice president of communications at the National Foundation for Credit Counseling. He recommends checking your credit report and score to see whether you’ve moved into a higher score range. If that’s the case, you may be able to negotiate a better interest rate on your credit card.
■ Consolidate your debts: That higher credit score might also make you eligible for a balance transfer credit card with a no-interest promotional period, or a lower-interest personal loan. These can both give you a reprieve from high interest, but note that it depends on the terms you can qualify for. And in the case of balance transfer cards, the interest rate will go right back up once the 0 percent period ends.
■ Revisit your budget: The more money you can apply toward your monthly credit card payment, the sooner you can get out of debt. But that’s easier said than done in a time of higher prices. “The interest rate hike doesn’t live in a vacuum,” Mcclary says. “Other things continue to happen that increase financial pressures on every American.” If you don’t know where to begin, Mcclary recommends getting budgeting help from a financial counselor or a nonprofit credit counseling agency. “Anything people can do to be proactive, they’ll thank themselves for later.”
■ Use a debt repayment method: This can help you stay organized and motivated, especially if you have multiple debts at the same time. Akeiva Ellis, a certified financial planner and founder of financial literacy brand The Bemused, suggests the debt avalanche repayment method, where you list your debts in order from highest to lowest interest rate, make minimum payments on all of them and apply any extra money in your budget to the highest-interest debt first. Once you pay that off, focus on the next debt on the list, and so on. “For most people, credit card debt is their most expensive debt,” Ellis says. “So it is something that usually I’d encourage people to focus on first.”