Lowering debt before interest rates rise
“A healthy economy can be a dangerous thing,” said in Bloomberg.com. American consumers have a history of loading up on debt when the economy is booming, “then paying dearly when the bills come due.” That’s because a growing economy is often accompanied by higher interest rates, making debt more expensive. There are signs now “that consumers could be putting themselves in peril.” Credit-card spending in the U.S. “surged” to $3.5 trillion last year, a 9.4 percent increase over the year before. Last month, the Federal Reserve hiked the federal funds rate to 1.75 percent, the highest since 2008 and the first of three likely increases this year, said Nick Clements in Forbes.com. These hikes will directly affect credit-card holders, because the prime rate used by most card companies and the federal funds rate “are almost exactly correlated.” So when you hear that the Fed has “increased rates by 0.25 percent, you can expect your credit-card interest rate to increase by 0.25 percent.”
Now is a good time to familiarize yourself with the details of your card’s interest rate, said Anna Bahney in CNN.com. Card companies can generally raise your rate on future purchases “at any time for any reason, as long as they give you a 45-day notice.” If you have recently transferred your balance to a card with a promotional interest rate of zero, be sure to “watch the clock.” As soon as the promotional period expires, your interest will likely “reset at a much higher rate.” Pay particular attention if your card is attached to a rewards program, said Maria LaMagna in MarketWatch .com. Spending incentives such as airline miles, hotel stays, and cash rewards may not be so enticing if they are packaged with exceedingly high interest rates. The cards can quickly trap holders in a cycle of debt. In a recent survey of rewardscard holders, 32 percent of those carrying a balance said they planned to use their rewards for paying off their debt. As a cardholder, “this is the worst mistake you could make.”
There are options if your debt feels unmanageable, said Terri Cullen in CNBC.com. Consider a zero-interest balance transfer card or check to see if you already have a card that offers lower rates on transfers. “Keep in mind that many balance transfer cards charge a transfer fee of about 3 percent.” And be sure to use the 6 to 18 months of zero interest to really knuckle down and chip away at your balance. Whatever you do, act soon: If the Fed has three rate hikes of 0.25 percent this year, the average cardholder could see annual interest payments rise by more than $300. “So it pays to get moving.”