Do you have a credit card that carries a balance? If so, then you may want to pay it off as soon as possible.
The U.S. Federal Reserve is looking at increasing interest rates, and this may have the undesirable consequence of credit card interest rates possibly increasing. In this post, we’ll talk about how these two things are connected, and what you might be able to do to avoid paying more in interest than is needed.
What is the Connection Between Federal Rates and Credit Card Interest?
As you’ve most likely already encountered, the cost of just about everything has gone up over the past year. This is due to inflation which was recently reported as being at a 40-year high of 7.9 percent when compared to this time last year.
To help combat this situation, the Fed has announced that they’re planning a series of rate hikes. The first increase already took place in March and six more are likely to happen throughout the remainder of 2022.
When the Federal rate changes, it affects something called the primate rate. The prime rate is an internal interest rate that the banking industry uses to set the standards for each of its products like mortgages, loans, and credit cards.
Therefore, a change to the Federal rate has a ripple effect across the market. This can be especially burdening for products that have a variable interest rate (such as credit cards) because lenders can change them without notice.
How to Avoid Increasing Interest Rates on Your Credit Cards
While consumers have no direct influence over the Federal Reserve or interest rates charged by banks, there are some strategies they can use to protect themselves.
1. Pay Off Your Balance
The absolute best way to avoid credit card interest is to not carry a balance in the first place. Understandably, that’s easier said than done, and it will take some work to get there, but paying off as much as possible every month will help prevent interest from snowballing.
2. Getting Cards with a Zero-Percent APR Offer
If you know in advance that you’ve got purchases that will add to your existing credit card balance, then try getting a new credit card with a zero-percent purchase APR offer. Many credit card companies offer this benefit to new cardholders and the period may possibly last anytime between 6 and 18 months. Just be sure to pay off your balance between now and then so that you don’t get hit later with even more interest.
3. Make a Balance Transfer
Credit card companies may let you transfer the balance from an outside card with a high-interest rate to their card with a temporarily lower or even zero-percent APR. Although there will most likely be a small fee, borrowers can use a balance transfer credit card as an opportunity to possibly pay off the balance without accruing interest before the lower rate period expires.
Don’t Wait to Act
While the interest rate hikes by the Fed are ultimately meant to help to stabilize the economy over the long term, they can have undesirable short-term effects such as having to pay more interest on your credit cards. Since the Fed has made it clear that they intend to raise rates, the sooner you can take action to pay off your balance or transfer the funds, the less you’ll most likely be impacted financially.