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It’s definitely something to think about these days.
The Federal Reserve has been raising interest rates to cool inflation.
Because credit card interest rates tend to be variable, those rate hikes might make your debt more expensive to pay off.
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In February, the Consumer Price Index showed that living costs were up 6% compared to a year prior. And that’s a major problem for the Federal Reserve.
The Federal Reserve has made it clear that it likes to see a 2% annual rate of inflation over the long run. That rate, it feels, is most conducive to a stable economy and general economic security among consumers.
To combat inflation, the Federal Reserve has spent the past year raising its benchmark interest rate. And so far, it’s raised rates twice in 2023.
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More so than that, the Fed most likely isn’t done raising interest rates. And that’s something credit card borrowers need to be aware of.
The interest rate on your debt could climb
The Federal Reserve is not tasked with setting consumer borrowing rates. So the interest rate you’re paying on your auto loan, personal loan, or mortgage is determined by your lender itself.
That said, when the Fed raises its federal funds rate, which is what banks charge one another for short-term borrowing, the general cost of consumer borrowing tends to rise.
Now, if you’re sitting on debt with a fixed interest rate, additional rate hikes on the part of the Fed this year won’t impact it. For example, if you signed a 30-year fixed mortgage last year at 6.5%, that rate won’t change this year regardless of what the Fed does.
It’s when you’re carrying debt with a variable interest rate that you need to be more vigilant. And credit card debt tends to fall into that category.
In fact, one major drawback of carrying a balance on a credit card is that you’ll generally not only be starting out with a higher interest rate, but a rate that has the potential to climb if that’s what market conditions dictate. So if you owe money on a credit card now, the sooner you can pay it off, the better.
A balance transfer could bail you out
Maybe you racked up a $3,000 credit card balance last year as inflation began to soar and your paycheck couldn’t keep up. The more interest you rack up on that balance, the harder it’s going to be to shed. So you may want to consider a balance transfer to a card with a 0% introductory APR.
If you have decent credit, you might qualify for a balance transfer offer. And if you’re able to transfer an existing balance onto a new card that won’t charge you interest for, say, 12 months, that could give you a chance to get ahead of that debt. You might, for example, decide to take on a side hustle for the remainder of the year to round up the money to pay off your balance. And if you’re not accruing additional interest, that may be more feasible.
All told, any credit card balance you have right now has the potential to cost you even more in the course of the upcoming year. So if you’re able to pay down that debt, you might save yourself a lot of money.