Fed Rate Hikes Are Coming: What To Do With Your Credit Card Accounts

Last month, the Federal Reserve signaled it may raise interest rates for the first time in more than three years. Chairman Jerome Powell indicated this may be one tool that is used to help curb the skyrocketing inflation we are all experiencing.

If you pay your entire credit card bill in full every month, these rate hikes will have very little, if any, effect on your credit card account. But if you carry a part of your balance from one month to the next, you will soon start to pay more in interest penalties.

Why? The great majority of cards are variable cards whose interest rates are tied to the Fed’s short-term interest rate. The Federal Funds Rate determines how much interest financial institutions charge one another to borrow money. An increase of the Federal Reserve’s rate of, say, 0.5% would soon lead to a corresponding increase in the APR on your credit card. So whatever balance you are carrying on that account from one month to the next will be charged a higher rate.

These interest rate hikes are almost surely coming, and it’s likely to be more than one increase. To minimize the impact of these increases, there are several things you should do if you carry an ongoing balance on your credit card account.

Cut Back Spending With Your Card

If you are carrying a balance, do not make any more transactions on your credit card. You may be putting your everyday expenses on your card, and not giving it a second thought. Stop this practice. You are simply adding to your balance and that will cost you more money once an interest rate hike is passed on by your card issuer. You obviously still have to purchase things, but now is the time to start paying cash or using your debit card in order to avoid adding any balance to your credit card account.

Request a Lower Interest Rate from Your Card Company

It is worth calling your credit card company and asking for a lower interest rate, particularly if your credit situation has improved since you opened the account. Be polite when you call, and prepared to explain why you think you deserve a better rate. If your credit score has improved significantly and you have been a good cardholder with this issuer for some time, you may have a better chance of lowering your interest rate.

Consider a Balance Transfer

If your current credit card has a high balance and you have a good credit score, you may want to consider a balance transfer to a new card. There are some cards that offer 0% APR for a period of time if you transfer an existing balance. These offers used to be plentiful before the pandemic but there are still some major cards that offer a special APR for balance transfers for people with good or excellent credit.

Before applying for the new card and transferring your balance, make sure this move will save you money in the long run. Consider any balance transfer fees which will be charged, and add these to the total debt. Most card issuers charge between 3% and 5% on balance transfers. Thus, if you are transferring a balance of $5,000 to the new card, you will be charged a fee of $150 to $250. And you want to make sure you can pay off the transferred balance before the lower introductory rate expires or else the balance transfer could end up having a minimal effect.

Pay Down Your Balance As Fast As Possible

Now is the time to pay off as much of your balance as quickly as you can. Don’t get caught in the trap of only making your minimum payment each month. Direct the maximum amount of money you can afford to pay down your balance. If you have some money in a regular savings account, it likely is not making much in interest right now; consider using this to pay down your balance. On your credit card accounts, begin making micropayments instead of one monthly payment. As long as you pay the minimum payment by the due date, you can make multiple small payments during the billing period. Eat a meal at home instead of going out to dinner, and immediately go online and apply the money you saved to your credit card balance.

Never Be Late on a Card Payment

If you are late on one of your monthly credit card payments, most issuers will immediately increase your interest rate, and usually by a significant amount. Make every effort to pay your bill well before the due date. Most issuers allow you to set up text or email alerts to remind you when your payment is coming due. Better yet, set up your card payment on automatic bill pay so you never miss a payment.

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