Over the past year, the federal funds rate rose by approximately 0.75 percent, hitting the 1.75 – 2.00 percent level in June 2018. The Federal Reserve hinted that another rate increase might be on the horizon, and that could spell trouble for borrowers.Rate increases help keep inflation in check but also make it more expensive for everyone to borrow. Plus, if you have a variable interest rate on your credit card, your rates may increase on your existing debt. What borrowers need is a credit card strategy.
Get A Great Credit Card Strategy
One estimate suggests that 92 million Americans will feel the sting of higher payments. Having a credit card strategy that combats rising interest rates is wise, especially in today’s climates. Ultimately, you have a few options for managing the change, though you can also combine some techniques to get a better effect.
Pay Down Your Credit Card Debt
If you have variable APRs on your credit cards, paying down your debt can help you save money. Companies calculate interest according to the amount that you owe. If you owe less in debt, then you’ll lower your liability.
This approach can be beneficial if you have a card with a good rate but want to avoid paying more monthly and in interest. If you have extra money in savings that isn’t part of an emergency fund or earning more in interest than your card is costing you, consider directing it to your highest interest card.
Make a Phone Call
In some cases, you can actually negotiate a lower interest rate with your credit card issuer. However, this does mean you’ll need to call them and see if they’ll play ball.
Usually, this approach will only work if you have been a reliable customer and a credit score that supports your request. For example, if your credit score is higher today than when you originally got the card, this works in your favor. If the reverse is true, it might not work.
However, it typically doesn’t hurt to try unless you are in a substantially worse financial position today than when your rate was set. In those cases, alerting your issuer that you’re a bigger credit risk could lead to a negative outcome.
For instance, a significant drop in your credit score could trigger an interest rate increase for new purchases. Based on the Card Act, you would have 45 days to either accept the terms or close your account. It’s important to note that this does not apply to increases when the prime rate goes up, impacting variable APRs. Those are allowable at all times.
Consider a Balance Transfer
When it comes to credit card strategies, this one is generally the riskiest. It involves opening a new card with a better rate (at least for balance transfers) and shifting what you owe on one card to the new account.
The reason this is risky is twofold. First, most balance transfers have fees which can wipe out an interest you may save depending on the amount. If there is a 3 percent fee, and you transfer $10,000 in debt, that transfer costs $300. Some cards will waive these fees on new accounts, but you need to read the fine print to find out if that applies.
Second, a balance transfer special interest rate is usually short-term. It may give you relief for only six months or a year. Additionally, if you miss or are late on a payment, your teaser rate may vanish early. Again, reading the fine print is essential, particularly if the interest rate after the transfer is higher than your existing card.
It’s also important to note that opening a new card can harm your credit. A hard inquiry has an impact on your score and new accounts change the average age of your accounts. How much your score will shift depends on your unique situation, but losing some ground isn’t uncommon.
If you have poor or fair credit, or are a low-income household, there’s also no guarantee that you’ll be able to open a card with a balance transfer teaser rate. Additionally, you may not receive enough credit to transfer your entire debt, even if you get the card.
Pay Off Your Cards with a Loan
Funds from personal loans and home equity loans or lines of credit can be used to pay off your credit cards. This works similarly to a balance transfer in that you still owe the money, but hopefully at a lower rate.
One benefit of this approach as personal and home equity loans tend to have fixed interest rates. This means, even if the Federal Reserves increase their rates again, your interest rate won’t change.
Home equity products typically have lower interest rates than personal loans, but you do have to put your property up as collateral. Personal loans might not require collateral, allowing some to function as unsecured debts.
Before using this approach, you need to determine if your credit score will help you get a lower rate and if you can borrow enough to pay off the card. Otherwise, this approach may not be beneficial.
When developing a credit card strategy for rising interest rates, it’s important to realize that not all techniques will work for all people. In the end, don’t count on a new card or loan as a solution unless you have the credit score and history to make you an attractive borrower.
Do you have a credit card strategy to combat rising interest rates? Tell us about it in the comments below.
Looking for more great articles about credit? Here are a few to get you started:
- How to Raise Your Credit Score by 200 Points
- Which Credit Card has the Best Travel Rewards Program
- What to Look for in a Business Credit Card
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