Inflation and Rising Interest Rates Mean You Should Pay Off Your Debt Now
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Some of your debt is about to get more expensive
On Wednesday, the Federal Reserve raised its key rate by a quarter of a percentage point. This, in turn, will likely impact the rates charged on your credit cards.
The average rate is just over 16% right now, according to The bank rate.
The increase isn’t going to financially upend too many people’s world, said Matt Schulz, chief credit analyst for LendingTree.
“The big danger is that this will happen multiple times over the next few months and potentially in bigger chunks,” he said.
The central bank is forecasting six more hikes in 2022, which could mean a rate of 1.9% by the end of the year. The Fed plans three more hikes in 2023.
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The Fed has started raising rates to fight inflation, which is at its highest level in over 40 years. As prices rise on everything from groceries to cars, many are turning to credit cards for relief.
During the Covid-19 pandemic, 30% of American adults increased their credit card debt, LendingTree found. Of these, 48% cited inflation and 34% cited loss of income as the main drivers of debt. The online survey of 1,249 consumers, conducted by Qualtrics, was conducted from February 7-10.
Whether it’s credit card bills or another type of debt, like personal loans or medical bills, it’s good to have a plan in place to pay them off.
Identify where you’re spending money and see if it aligns with your goals, he said. You can also look at where there may be unnecessary spending, where you can cut back, and by how much, he said.
“Budgeting is not about cutting spending to the lowest possible level — that’s both unrealistic and unsustainable in the long run,” Wang said.
“You want to find areas where you can cut a little to help you find money that you can spend on your debts.”
You also need to get a picture of your debt situation. Make a list of what you owe, who you owe it to, your minimum payments and your interest rates, suggests Nicole Victoria, financial coach and TikTok Creator known as No Budget Babe.
The list should go from the highest interest rate to the lowest interest rate.
Once you have your list of debts, establish a repayment plan. Wang and Victoria like to pay off the highest debt first, known as the avalanche method.
Another option is to start with the lowest balance, to get the psychological reward of paying off a loan or credit card.
“Mathematically, the avalanche method allows you to save more money and pay off more debt in a shorter amount of time,” Victoria explained.
“However, ultimately the goal is to pay off your debt, so if you feel better with the other method, that’s fine.”
If you have good credit, consider transferring your high-interest debt to a zero-balance credit card. Many offer up to about 21 months without interest, said Schulz of LendingTree.
Just be sure to pay the balance and not add more. Also, understand all the fees, deadlines, and other fine print before signing up. For example, there is often a one-time fee for each balance transfer, around 3% to 5% of the balance.
Another option is to transfer high-interest debt to a low-interest personal loan.
Few people ask their credit card company to lower their rate, but it often works. A pre-pandemic survey conducted by LendingTree in 2019 found that 80% of those who requested for a lower interest rate were successful.
The best way to approach your lender is to arm yourself with other offers you’ve seen, so you can play one credit card issuer against another, Schulz advised.
“It’s such a competitive market today that there’s a very good chance, especially if you have decent credit, that they will work with you to some degree,” he said.
You can also try negotiating your bills, from rent — depending on where you live — to your cable, phone and car insurance, Victoria said.
Along the same lines, if possible, consider asking for a raise at work. Doing side work can also help boost your income, as can selling any items you may have around the house.
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