If you have a credit card balance, you should read this.
- The Federal Reserve announced a substantial hike to its benchmark rate on Wednesday.
- As interest rates rise, variable rate loans will become more expensive.
- If you carry a credit card balance, you may want to consider a balance transfer or personal loan to avoid rising costs.
On Wednesday, May 4, 2022, the Federal Reserve announced a large increase in interest rates. Specifically, the central bank said it was raising rates by 50 basis points, or half a percentage point.
Rates hovered around 0% during the pandemic as the Federal Reserve tried to boost the economy. However, rampant inflation in 2022 caused the Fed to change course. Rates rose 25 basis points in March, which was the first increase since 2018, and have now risen even higher, taking the target rate to between 0.75% and 1.00%.
To be clear, this target rate, called the fed funds rate, is not what individual borrowers pay, but rather is the benchmark rate and the rate at which banks can lend excess reserves to each other overnight. the morning. Still, rising rates affect individual borrowers, and in many cases could make your current credit card debt more expensive.
Here’s why rising interest rates will affect the cost of your credit card debt
If you look closely at your credit card agreement, you’ll likely see that the interest rate you’re charged isn’t a fixed rate. Instead, credit card rates are almost always variable. This means that they are linked to a financial index and move up and down along with it.
When the fed funds rate goes up, it usually means your interest rate will go up too, and usually very quickly. You can expect to see a higher interest rate typically within a billing cycle or two after the Federal Reserve makes a change. And since today’s half-percentage-point increase is the largest in decades, your credit card interest rate is likely to rise substantially.
The Federal Reserve has also signaled that more rate hikes are on the way, so this worrying trend is likely to continue this year.
This is what you can do about it
As your credit card debt gets more expensive, there are a few steps you can take to try to keep more money in your wallet and not have to send as much to your card issuer.
First of all, if you can pay your balance to $0, you should try to do it as soon as possible. If you don’t have a balance on your credit card, you won’t have to pay interest on your purchases, and the rate increases won’t affect you at all. Of course, this isn’t always possible, but any progress you can make on paying down debt should help you limit the financial damage from rising rates.
You may also want to consider doing a balance transfer, especially if you have a substantial balance on your cards. If you can qualify for a balance transfer credit card that offers a 0% introductory rate or balances transferred, you can avoid having to pay back your loan at a higher rate. Typically, you’ll have to pay a small upfront fee of about 3% of the transferred balance, but then you’ll have about 12-15 months when your rate settles to 0%, and every dollar you send to your creditor will go toward capital reduction. .
The important thing is to be aware of the impact of rising rates and try to take action as soon as possible so that your credit card debt doesn’t cost you much more than expected.