Carrying credit card balances can be expensive. Personal finance experts say that it’s one of the biggest obstacles to building wealth. It can make it much harder to save up to buy a home, pay for emergency expenses, and put aside enough money for retirement.
Now, as the federal funds rate has been increased by the Federal Reserve, experts predict that credit card rates could reach a record high of 19%.
Customers who are already on higher-rate credit cards – typically those on low incomes or with other debts – are expected to be hit hardest by the hike in rates.
Credit card interest rates move in sync with the federal funds rate. According to experts at Bankrate, the average credit card interest rate could rise later in the year.
This means that the minimum payments for cardholders will go up each month, and it’s likely more customers will only be able to pay the minimum. Most credit card companies charge their customers between 1% and 5% of their balance as a minimum payment.
By only paying the minimum each month, cardholders end up paying more interest and it can drastically extend the length of time it takes to pay off the balance. With higher interest rates, this could mean it takes those customers even longer to clear their debts.
Tips for managing debt
It can be easy to get stuck in a debt cycle. With interest rates rising, here are some tips to pay off debts faster and avoid getting into more financial difficulty:
1. Make an action plan
First and foremost, it’s essential to make a plan. Start by making a list of your debts, including key details like who you owe money to, how much it is, and your current payments.
Your priority debts should come first. This includes things like your mortgage or rent, taxes, utility bills, and court fines. Then, you can think about your non-priority debts like credit cards, overdrafts, and store cards.
2. Create a budget
When you have a clear picture of what you owe, the next step is to make a budget to see what your income and expenses are. Your disposable income is how much you can offer creditors.
3. Speak to your creditors
If you’re struggling, it’s important to talk to your creditors first to arrange a repayment plan. Make sure your offer is affordable and realistic so you can stick to it going forward.
4. Find a better deal
In some cases, it might be possible to save money by shopping around for a better deal. For example, if you’re struggling with a large credit card balance, transferring the debt to a card that charges no interest for a year could help you pay off your balance faster.
5. Get independent advice
Lastly, if you’re struggling with debt, it’s important to get independent debt advice. This could be a charity, or a government or private organization, depending on your needs.