The Federal Reserve has begun to raise its federal funds rate, one of the reasons Wall Street is in the midst of a tailspin. But the change in policy is also affecting consumers who have run up large credit card balances.
Credit card interest rates move in sync with that key interest rate, and those already-high credit card rates have begun to move even higher. The experts at Bankrate predict that the average credit card interest rate will hit a record of 19% later this year.
Rising rates mean the minimum payment that cardholders must pay each month will likely also go up. Credit card companies charge between 1% and 5% of the balance as a minimum payment.
Only paying the minimum payment each month means most of the payment goes to interest, extending the time it will take to pay the balance down to zero. When the interest rate goes up, even consumers paying more than the minimum will face a longer payoff period.
According to personal finance experts, credit card debt is one of the biggest obstacles to building wealth. It can make it more difficult to purchase a home or pay for an emergency expense.
Lock up the cards
Jay Zigmont, a certified financial planner and founder of financial advisory company Live, Learn, Plan, says literally locking your credit cards away can help get you on the right track.
“When you don't have debt as an option, you are required to live within your means,” Zigmont told ConsumerAffairs.
To live within your means, Zigmont says you need a budget. It’s important that the budget is tailored to the individual and prioritizes “needs” over “wants."
“You need a roof over your head and basic transportation,” he said. “You may want a nicer house or a new car. Watch out for things that you 'feel you deserve.' Most often when people say they 'deserve' more, it is because of outside influences including friends, family, and social media.”
Paying off new credit card charges in full each month is also necessary to avoid expensive debt. Consumers who are already struggling with a credit card balance can pay it down faster by transferring the balance to a credit card that charges no interest for a year or more.
Check out ConsumerAffairs' guide to the best balance transfer cards for more information.