In addition to rising prices at the grocery store and at big box retailers, Americans can expect to pay even more if they purchase goods and services with a credit card and carry a balance. Wall Street analysts at Goldman Sachs are forecasting that the U.S. Federal Reserve will raise interest rates four times in 2022, once more than previously expected. Further, rate hikes could begin as early as March, creating economic uncertainty for many.
For consumers, this means the price of borrowing will increase. Credit cards have a variable rate, typically conveyed as a percentage plus the prime interest rate. So when the prime rate rises, so will your credit card interest rate.
If you’re only making the minimum monthly payment, which is usually roughly 2% of your balance, you may not even be paying off the interest each month. The Experian State of Credit Report indicates that Americans carry an average of $5,525 in credit card debt — and pay roughly 16% in annual interest on that debt. Experts predict credit card interest rates could rise to 17% by the end of the year, CNBC reported.
If you carry the average amount of debt, that extra percentage point on your APR could add up to another $300 or $400 annually, CNBC said.
Rising Credit Card Balances Plus Inflation Could Lead to Financial Woes
After making a dent in their debt in 2020, thanks to federal stimulus funds and decreases in discretionary spending such as travel and entertainment, Americans’ credit card balances are once again starting to rise. The Federal Reserve Bank of New York reported that credit card balances increased by $17 billion in the third quarter of 2021, after Americans had paid off $83 billion in credit card debt the year prior.
Coupled with inflation, increased credit card debt and higher minimum monthly payments could lead some families to feel the budgetary crunch. “Since rates are really likely to go up, people’s credit card debt is only going to get more expensive,” Matt Schulz, chief credit analyst for LendingTree, told CNBC. “Now is the time to take some sort of action.”
How to Take Action on Your Debt
Fortunately, you have options when it comes to reducing credit card debt, especially if you have good or excellent credit. Consider looking for a 0% balance transfer offer, which can buy you up to 18 months of time to pay down your debt. Read the fine print carefully before you choose your card. You’ll want to do the math to find out if the balance transfer fees will make the switch worth it. Try to find a card with 0% interest, no annual fee, and no — or low — balance transfer fees.
You can also call credit card companies and ask for a reduced interest rate. If you’ve been a good customer who pays on time, they might oblige — especially if you threaten to switch your balance to a competitor.
If you have equity in your home, consider taking out a home equity loan or line of credit now, before mortgage rates rise even higher. Currently, average rates for home equity loans range from 3.25% to 7.94%, while home equity lines of credit (HELOCs) range from 1.99% to 7.24%. Either of these rates are better than what you would find with most credit cards. Additionally, consolidating high interest debt into one monthly mortgage payment may work better for some families than paying multiple credit card bills throughout the month.
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This article originally appeared on GOBankingRates.com: Why It’s Important To Pay Down Credit Cards as Interest Rates Rise — and How To Do So