What does rising interest rates mean for people with credit card debt?
By Brittany Watman, LendEDU
In the aftermath of the financial crisis that rocked the country in 2009, the U.S. Federal Reserve opted to lower its benchmark interest rate significantly as a means of encouraging consumers to spend. By lowering the benchmark interest rate to almost zero, the Fed hoped to bolster the economy.
In the intervening years, there have been relatively little changes to interest rates, with consumers being able to continue taking advantage of rates at near-historic lows. Even so, it’s practically a given that interest rates will once again rise. When they do, consumers need to understand how a rise in interest rates will influence their personal finances.
First, it’s important to understand what rising interest rates can affect. When the Fed begins boosting interest rates, a variety of types of debt can be affected, including not just mortgage rates but also car loans and credit card debt.
While even a slight interest rate increase of 0.25 percent might not be an issue at all for consumers who pay off their balances monthly, those who do carry a balance from month to month could be affected significantly. This is because an increase in interest rates would affect not just new purchases but also the entire balance. Increased interest rates mean it would not only take longer to pay off a large balance but also cost more.
Consumers who are struggling each month to pay their credit card bills or who are only able to manage the minimum payment will find that even a slight increase in rates could be a big issue.
As interest rates continue to rise, a greater amount of your monthly payment goes toward interest. At the same time, a smaller amount of your payment goes toward paying off your balance.
Fixed-rate credit cards fool many consumers, but in reality, even a fixed-rate credit card could be affected by rising interest rates. This is because credit card companies are required to provide you with only 15 days written notice before they can legally raise your interest rate.
Most credit products, including credit cards, have an interest rate that is associated with the prime rate. The prime rate is the benchmark used by banks to determine what will be charged on loans and other financial products. Interest rates may be fixed for a specific period, or they may be variable, which means the interest rates fluctuate along with the prime rate. The prime rate generally fluctuates when the Fed adjusts the federal funds rate, which the rate that banks must pay for overnight loans.
What can you do if you suspect interest rates may be on the rise? Actually, there are options available to consumers to help them avoid the full impact of rising interest rates on their credit card debt. One option would be to transfer your current balance to a lower-rate card. In considering this avenue, make sure you know whether the lower interest rate is only an intro rate. Many times, credit card companies will entice consumers to switch by offering a lower interest rate but it is only an introductory rate, meaning it will eventually increase. When that happens, you could find yourself facing the same situation.
Another option would be to consider consolidation with a personal loan. This could be a good solution if you have a large amount of debt and/or the debt you carry has high interest rates. When considering working with a personal loan company, make sure you are aware of all of the terms to determine whether this is the right solution for you.
For many consumers, debt consolidation can provide the opportunity to combine multiple loans and debts into a single debt, resulting in a lower interest rate, lower monthly payments and a single, easier-to- manage monthly payment. Lower interest rates also mean that you’ll be able to pay off your debt faster and in less time in most circumstances.
You might also consider waiting it out to see if your credit card company actually does raise the interest rate on your card. If so, contact the issuer and ask about reducing the interest rate for your card. If you have a good history of paying your bill on time, your credit card company might be willing to consider this, especially if the representative thinks the company may lose your business if you transfer your balance.
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