Fed hike or no Fed hike, your credit card debt is expensive. Here’s how to pay it off.

The cost of everything continues to rise. And if you have a credit card debt, this is also getting a little more expensive, thanks to a series of interest rate hikes starting this month.

With inflation at its level highest rate since the early 1980sthe Federal Reserve is adjusting interest rates hoping to re-stabilize the US economy. In short, the Fed changes the rate of federal funds, which alters the main rate: this is the rate that banks charge customers with high credit ratings. Credit card issuers are added to the preferential rate to set their interest rates, so when the preferential rate goes up, so will what you pay when you have debt.

Do you have all this? Great. Now forget what you just read and pay attention to this part: If you have a significant credit card debt, it really doesn’t matter what the Fed does. Your credit card debt has always been, and will continue to be, expensive.

The true cost of credit card debt over time

If you have a remaining $ 5,000 balance on your credit card month-to-month and your interest rate is 16%, you’ll spend $ 800 on interest over the course of a year. If your interest rate rises to 16.25%, that translates to just an additional $ 13 in interest for one year.

Technically, this means that this is not so much a rate hike, but a gentle slope. But $ 800 was a lot, not to mention the fact that you still have to spend extra money that you may not be able to return. Invoices don’t stop just because you’re in debt.

That’s why squeezing a stress ball while watching the news isn’t helpful in this case. What is useful is to deal with money problems head on.

“The hardest part is tearing up the bandage and just adding up the numbers to see how much you owe,” said Akeiva Ellis, a certified financial planner and founder of The Bemused, a financial literacy brand for young adults. “But if you’re able to get to that point, it’s really about making a plan. Don’t let your debt overwhelm you. The sooner you can tackle the numbers and design a plan to pay it off, the easier it will be. will breathe. “

How you can pay less interest

• BUY FOR BEST DEALS: The average U.S. FICO score increased to 716 in August 2021, and this increase was more common for those with lower credit scores. (FICO scores of 690 or higher are considered good credit.) “It may happen that when you applied for your account, your credit score was lower,” said Bruce McClary, senior vice president of communications for National Foundation for Credit. Advice. We recommend that you check your credit report and your score to see if you’ve moved to a higher score range. If this is the case, you may be able to negotiate a better interest rate on your credit card.
• CONSOLIDATE YOUR DEBTS: This higher credit score may also make you eligible for a balance transfer credit card with an interest-free promotional period or a lower-interest personal loan. Both may be of great interest to you, but keep in mind that it depends on the terms you choose. And in the case of balance transfer cards, the interest rate will rise again at the end of the 0% period.
• CHECK YOUR BUDGET: The more money you can apply for your monthly credit card payment, the sooner you can get out of debt. But it is easier said than done at a time of higher prices. “Rising interest rates are not living in a vacuum,” McClary said. “Other things continue to happen that increase financial pressures on all Americans.” If you don’t know where to start, McClary recommends getting help from a financial advisor or a non-profit credit counseling agency. “Whatever people can do to be proactive, they will thank themselves later.”
• USE A DEBT PAYMENT METHOD: This can help you stay organized and motivated, especially if you have several debts at once. Ellis suggests the debt relief method, where you list your debts in order of highest and lowest interest rates, make the minimum payments for everyone, and first apply the extra money from your budget to interest-bearing debt. higher. Once you’ve paid this off, focus on the next debt on the list, and so on. “For most people, credit card debt is their most expensive debt,” Ellis said. “So it’s something I would normally encourage people to focus on first.”

This article was provided to The Associated Press by the personal finance website NerdWallet. Sara Rathner is a writer for NerdWallet.