In July, the Federal Reserve (the Fed) raised interest rates 0.75% for the second consecutive month to a target range of 2.25% - 2.50%.1 The central bank also signaled that future rate increases may be in store through the end of the year as part of its ongoing effort to curb inflation.
While rate hikes can take time to filter through the economy, one of the first places consumers feel the impact is on revolving credit card debt. That’s because credit card rates are tied to the prime rate. When the Fed raises its target rate, the prime rate goes up and variable interest rates generally follow, such as the annual percentage rates (APRs) credit card companies charge consumers for revolving debt. For example, less than a week after the Fed announced its most recent increase, more than a dozen major lenders increased their advertised APRs by the same amount, pushing the national average to 17.92% for new credit cards. However, rates can go as high as 25% or more, based on an individual’s credit rating and other factors.2
Credit card balances in the United States have also risen this year to more than $841 billion. Outstanding balances vary somewhat by age, with borrowers ages 41 to 56 having the highest average balances at $7,236,
followed by baby boomers, ages 57-75, with an average balance of $6,230 as of June 30, 2022.3
When used judiciously, credit cards can be a useful tool for building your credit history and maintaining a strong credit score, which lenders use to help determine consumer creditworthiness. Your score influences your ability to qualify for credit and obtain competitive rates on mortgage, auto and other loans. Access to the best rates is important because the more you pay in interest, the less money you keep for yourself.
If you’re looking for ways to get out from under expensive credit card debt and free up more money to use toward savings and other important goals, consider the following:
1. Pay off revolving balances
Paying account balances in full each month is one of the best ways to increase your credit score over time while avoiding the high interest rates credit card companies typically charge on outstanding balances. But what
if you’re not in a position to pay off a large balance in full?
Unexpected expenses, budget constraints, overspending and other circumstances can lead to higher balances than anticipated and the need to spread payments over time. However, this can become costly, especially if you’re only paying the required minimum due each month.
For example, here’s how long it would take to pay off $7,000 worth of credit card debt at 16.28% interest:4
- Minimum monthly payment: 32 yrs., 3 mos. (Total interest paid: $13,336)*
- $150 monthly payment: 6 yrs., 3 mos. (Total interest paid: $4,162)
- $500 monthly payment: 1 yr., 4 mos. (Total interest paid: $816)
*Minimum payments are generally 1% of the outstanding balance but may vary based on individual credit card issuer terms and conditions and/or additional penalties and fees.
2. Consider a balance transfer
Balance transfers, which can help consumers save money and pay off high credit card balances faster, involve moving debt from a credit card with a high APR to a new card with a lower interest rate and, ideally,
a 0% introductory rate. A 0% introductory period provides an opportunity to pay down debt more aggressively during this temporary break from interest charges. While balance transfers may help you save money, strict
rules and guidelines apply, which may include stiff penalties and fees in the event of late or missed payments or other violations of account terms and conditions. So, make sure you read the small print before initiating a
3. Ask for a lower rate
If you prefer to remain with your current provider for the cardholder benefits or rewards, consider asking for a lower interest rate. Before contacting the issuer, take time to review the APR and account holder terms and conditions on your current account, your credit score and payment history, and competitor offers. This information can be useful for stating your case when seeking a lower rate.
4. Consolidate debt
If you have multiple credit card balances, it may make sense to consolidate debt through a lower-interest personal loan. This can help reduce costs while streamlining debt management. To qualify for the most
favorable terms and rates, your credit score will need to be in the “good” to “excellent” range.
Finally, while it may seem prudent to close accounts that you have paid off and no longer use, doing so can cause your credit score to drop. That’s because closing accounts increases your credit utilization ratio, which is
the amount of revolving credit you're currently using divided by the total amount of revolving credit available to you. Instead of closing the account, consider placing the card in a secure location where you don’t have ready
access to it and remove it from your digital wallet. For more information about managing your credit score, visit myFICO.com.
To learn more about these and other financial management strategies, call the office to schedule time to talk.
2 Creditcards.com; Average credit card interest rates: Week of August 3, 2022.
This information was written by KRW Creative Concepts, a non-affiliate of the Broker/Dealer.