Forget the Federal Reserve, Pay Off Your Credit Card Debt | personal finance

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The cost of everything keeps going up. And if you have credit card debt, that’s going to get a little more expensive, too, thanks to a series of interest rate hikes starting this month.

With inflation at its highest rate since the early 1980s, the The Federal Reserve is adjusting interest rates to hopefully restabilize the US economy. In short, the Federal Reserve changes the fed funds rate, which alters the prime rate, which is the rate banks charge customers with high credit scores. Credit card issuers add to the prime rate to set their interest rates, so when the prime rate rises, so does what you’ll pay when you’re in debt.

Do you have all that? Great. Now forget what you just read and pay attention to this part: If you have significant credit card debt, it really doesn’t matter what the Federal Reserve is doing. Your credit card debt has always been and will continue to be expensive.

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The true cost of credit card debt over time

If you have a remaining balance of $5,000 on your credit card from one month to the next, and your interest rate is 16%, you will spend $800 on interest over the course of a year. If your interest rate increases to 16.25%, that translates to just an extra $13 in interest for a year.

Technically, that means it’s not so much a rate hike as a gentle upward slope. But $800 was already a lot, and that’s without taking into account the fact that you’ll still need to spend additional money that you may not be able to pay back. Bills don’t stop just because you’re in debt.

This is why squeezing a stress ball while watching the news is not helpful in this case. What’s helpful is facing money problems head-on.

“The hardest part is taking off the Band-Aid and just adding up the numbers to see how much you owe,” says Akeiva Ellis, a certified financial planner and founder of The Bemused, a financial education brand for young adults. “But if you’re able to get to that point, it’s really about making a plan. Don’t let your debt overwhelm you. The sooner you can face the numbers and devise a plan to pay them off, the easier you’ll breathe.”

How can you pay less interest?

Look for better deals

the average american FICO Score it increased to 716 in August 2021, and that increase was more frequent for those with lower credit scores. (FICO scores of 690 or higher are considered good credit.) “It can happen that when you applied for the account you have, your credit score was lower,” says Bruce McClary, senior vice president of communications for the National Foundation for Credit. Advice. He recommends checking your credit report and score to see if you’ve moved to a higher score range. If that’s the case, you may be able to negotiate a better interest rate on your credit card.

Consolidate your debts

That higher credit score could also make you eligible for a balance transfer credit card with an interest-free promotional period, or a personal loan with lower interest rates. Both can give you a break from high interest, but keep in mind that it depends on the terms you may qualify for. And in the case of balance transfer cards, the interest rate will go back up once the 0% period ends.

Check your budget

The more money you can apply to your monthly credit card payment, the sooner you can get out of debt. But that is easier said than done in an era of higher prices. “The interest rate hike doesn’t live in a vacuum,” says McClary. “Other things continue to happen that increase the financial pressures on all Americans.” If he doesn’t know where to start, McClary recommends getting budget help from a financial advisor or a nonprofit credit counseling agency. “Anything people can do to be proactive, they’ll thank you later.”

Use a debt payment method

This can help you stay organized and motivated, especially if you have multiple debts at the same time. Ellis suggests the debt avalanche payment method, where you list your debts in order from highest interest rate to lowest, make minimum payments on all of them, and apply any extra money in your budget to the debt with the highest interest rate first. Once you pay that off, focus on the next debt on the list, and so on. “For most people, credit card debt is the most expensive debt,” says Ellis. “So, it’s something I generally encourage people to focus on first.”

This article was written by NerdWallet and originally published by The Associated Press.

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