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 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.
HOW YOU CAN PAY LESS INTEREST
— 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 don’t live in a vacuum,” says 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.”
— USING A DEBT REPAYMENT 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 their most expensive debt,” Ellis says. “So that’s something I usually encourage people to focus on first.”
This column was provided to The Associated Press by personal finance website NerdWallet. Sara Rathner is a writer at NerdWallet. Email: firstname.lastname@example.org. Twitter: @SaraKRathner.