Credit Card Rate Hikes

The Fed increased interest rates for the second time in three months on March 15. It’s made headline news. There have been hints of additional hikes in 2017. So what does this mean for the 157 million Americans who hold credit card debt?

The Con of Variable-Rate Debt

Credit cards are typically the most expensive type of loan. Interest rates are variable, meaning they are tied to market conditions such as the prime rate or other rates (like LIBOR) that banks use to lend money to each other overnight. These rates are highly variable and change quickly due to market conditions.

As rates go up, so does the amount of interest charged on credit card debt. That means minimum payments increase and it’s harder to pay down the principal. Based upon this CNBC article, the average household pays over $1,300 a year in interest. As rates increase, so does this expense.

Many consumers have been lulled by the relatively low cost of borrowing money. The economy is shifting, creeping up from record-low levels. This is the perfect time to evaluate your outstanding debt — all your debt. It’s also the perfect time to really examine your spending habits to see where you can cut back and pay down debt before interest rates go even higher. If you’re a homeowner, now may be the time to refinance, or convert credit card debt into secured or fixed-rate debt.

As with any important financial decision, run the numbers. Talk to your CPA or financial advisor. If you need help in organizing your finances and calculating what goes out each month, Fiscally Fit can help.

The Flip Side

With low-interest rates, the interest earned on savings accounts has been paltry for the last several years. Hit hardest are seniors living on a fixed income who count on the interest earned on Certificates of Deposit (CD). So there’s an upside with interest rates increasing. Hopefully, we’ll see banks inch up deposit rates on money market accounts and CDs. But don’t hold your breath. According to another CNBC article, savers won’t get much benefit for a while.

Certainty In Uncertain Times

You can’t control the economy. But you can control what you spend and save each month. The first step is to know your financial goals. Do you want to travel the world? Retire at age 50? Once you know your motivation, then you can analyze your financial situation to figure out a workable plan.

Feel overwhelmed? Don’t worry, help is just a phone call away.

Photo credits: frankieleonGotCredit

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