Credit card

Your credit card debt could be about to get more expensive. here’s why

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If you have a credit card balance, you need to read this.

Key points

  • Credit cards can be an expensive type of debt.
  • Interest rates can increase even more on credit cards.
  • The Federal Reserve is raising interest rates, which will have an impact on variable interest rates.

Credit card debt can be a very expensive type of debt because the cards have high interest rates.

If you pay off your entire balance, you don’t have to worry about it, because you won’t pay interest. But if you have a balance, you can expect to pay more than 17% in most cases. This is what makes paying a credit card bill so difficult.

Unfortunately, for those with a balance – or anyone who might in the future – things could actually get worse. Credit card interest rates could climb even higher, which means it will cost you more and take longer to get you out of debt.

Here’s why credit card interest rates are rising

Credit card interest rates are increasing for borrowers for a simple reason. The Federal Reserve has raised interest rates several times this year and is expected to do so again in the near future.

Credit cards come with variable interest rates, which means the rate adjusts based on the movement of a financial index. Many cards are tied to the prime rate, which moves with the Fed’s target rate. When the Federal Reserve raises its rates, the prime rate rises and the credit card companies also raise their rates.

The Federal Reserve is the central bank of the United States and one of its purposes is to help fight inflation. Inflation has been on the rise, with the most recent reports indicating that the price of goods and services rose 9.1% in June from a year earlier.

The Federal Reserve’s target inflation rate is 2%, which is obviously well below the rate at which prices are currently rising. With inflation currently at a roughly 40-year high, the Federal Reserve is under intense pressure to continue raising interest rates in order to tighten the supply of credit. This reduces the money available to spend, which in turn reduces demand which creates inflationary pressures.

If the Federal Reserve raises rates again this year, which is already expected and which is the most likely outcome given the high inflation numbers, you can expect your credit card rate to continues to increase and your debt balances out. more expensive.

What can you do to avoid high finance charges?

The best thing to do as variable rate credit card debt gets more and more expensive is to pay off what you owe. Credit card debt is generally not considered “good debt” due to high rates. So it’s always ideal to pay off your balance when you can – and that’s even truer now, as finance charges are likely to keep rising.

If that’s not feasible for you, you might want to look at techniques that might prevent interest rates from rising. You can, for example, apply for a balance transfer card and transfer your existing balance to it.

Balance transfer cards have promotional rates of 0%, although there is usually a small upfront fee of around 3% to 4% of your transferred balance. Compared to the interest you would pay over a year, these fees are worth it. Be aware, however, that you have a limited time when the 0% rate is in effect. It usually lasts about a year before rising.

You can also consider a fixed rate personal loan to refinance your cards, which would allow you to lock in a more affordable interest rate for the entire repayment period.

Exploring these options is a good idea with the Federal Reserve likely to raise rates again, because you don’t want to spend even more of your hard-earned money paying off your creditors what you owe.

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