- The central bank recently raised its target federal funds rate by 0.75 percentage points.
- This move is an effort to curb inflation, and is just one of many rate hikes expected to take place this year.
- If you have credit card debt, experts recommend paying it off as soon as possible.
The move is an effort to curb inflation, and is just one of many rate hikes expected to take place this year. The central bank said it expects the Fed funds rate to increase by roughly another 1.75 percentage points over the next four policy meetings, to end the year above 3%.
"They want to slow down the economy," says Mark La Spisa, a certified financial planner and president of Vermillion Financial in Barrington, Illinois.
An interest rate hike means you'll pay more to borrow money. The Fed's benchmark rate influences those for many consumer financial products. Here's what to know if you're carrying credit card debt.
Although all debt will be influenced by the Fed's decision, credit card debt is especially vulnerable.
"For those with variable rates, it means rates will go up," La Spisa says. "Credit card balances are going to get much more expensive more quickly." That's why it's important to pay this debt down as soon as possible.
The average credit card rate is currently 16.78%, according to CreditCards.com. Due to Fed interest rate hikes earlier this year, "borrowers shopping for a new card are already seeing higher APRs on most new card offers than they had previously seen in years," the site notes. Rates could run 17.53% or more by July, it predicts.
Depending on how much of a balance you're carrying, rising rates could add significantly to your costs and make it harder to dig out of debt.
Here are three steps you can take to create a plan and start addressing your debt.
- Pick a method to pay down debt: There are two notable methods to paying down debt: avalanche and snowball. In either case, you'll make the minimum payments on all your cards, and focus and extra cash on one particular balance. Using the avalanche method means you focus on your highest interest rate loans first, which will save you more money in the long run. Using the snowball method means focus any extra funds on paying off the smallest balances first to get them out of the way before moving on to bigger ones.
- Plan ahead for big purchases: If you are planning to travel later this summer or in the fall, start cutting spending now. That lets you build savings and create room in your budget to accommodate those upcoming costs.
- Put debt repayment on autopilot: "Set it up as an automatic payment," La Spisa says. This will ensure you pay on time every month and keep you on track, which is especially important with high interest rate loans. Plus, you'll avoid expensive late fees that can add to your balance.
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