Credit Card Debt Continues to Get More Expensive
If you carry a credit card balance, you probably regularly check your monthly statement. You might have noticed something surprising over the past year—even though you are regularly paying your debt, your balance does not seem to be declining as fast as it should.
There is a simple reason—your interest rate has probably been increasing over the past year. If possible, log into your account and check each monthly statement over the past year. You might be surprised to see that your interest rate has been going up in 0.25% increments every few months.
The bad news is that an increase in rates is not about to slow down any time soon, and we explain why in this article.
The Federal Reserve is Raising Short Term Rates
One way the Federal Reserve stimulates the economic is to lower short-term interest rates, which should make it more attractive for people to take on debt. The downside is that once the economy begins to recover, the Federal Reserve hikes rates to prevent the economy from overheating.
Credit card companies use the “prime” rate as a benchmark when setting their interest rates, and the prime rate is usually set 3 points above the federal funds rate, which the Federal Reserve controls. The Federal Reserve has raised interest rates a quarter of a percent two times this year already, in addition to three times in 2017. As the federal funds rate slowly climbs, so too does the prime rate—and credit card interest rates. Many economists predict the Fed will raise interest rates another two times this year, which should continue to push your credit card balances higher.
How to Counteract Rising Rates
Consumers carry debt do have options. For example, you might consider a balance transfer to a card that offers a 0% promotional rate, usually for 12-18 months. Balance transfers usually charge a nominal fee, around 2-4% of the balance amount. But if you can pay off your balance before the promotional period ends, you can usually save hundreds or thousands of dollars in interest.
However, consumers typically need very strong credit to qualify for a balance transfer card. What happens if you don’t? Instead, you could try credit counseling. With a counselor, you come up with a plan to repay your debt. Often, the counselor contacts your creditors and asks them to either lower your interest rate or waive penalties/fees.
Savvy consumers might also try to negotiate a lower interest rate with their credit card companies themselves. Lenders are not required to increase their interest rates just because the Fed raises the federal funds rate. If you present a compelling argument, your lender might drop your interest rate.
Sometimes, a debt load is simply too large to be manageable. In these situations, making a fresh start with a consumer bankruptcy might be the best choice.
At Nowack & Olson, our South Florida bankruptcy attorneys have helped all types of consumers file for Chapter 7, Chapter 11, or Chapter 13. For more information, please contact us for your free initial consultation. You have nothing to lose by picking up the phone.