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Your balance might cost you more over time.
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The Federal Reserve has been on a mission to fight inflation since early 2022. To that end, it’s been implementing aggressive interest rate hikes in an attempt to drive up the cost of consumer borrowing.
See, the reason inflation has been surging is that the supply of goods and services has not been able to keep up with consumer demand these past couple of years. By making it more expensive for consumers to borrow money in different forms, the Fed is hoping to encourage a pullback in spending, which should narrow the aforementioned supply-demand gap and help bring the cost of living down.
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But because inflation levels have been dropping, the Fed’s most recent interest rate wasn’t as aggressive as previous ones. The central bank announced a 0.25% rate hike on Feb. 1. When we compare that to the multiple 0.75% rate hikes that came down the pike in 2022, that’s clearly a far more modest increase. But if you owe money on your credit cards, it’s an increase you’ll want to be mindful of nonetheless.
Pay attention to your credit cards’ interest rates
The Fed is not in charge of setting consumer interest rates directly. This means the Fed doesn’t tell credit card companies how much interest they should charge, nor does it tell mortgage lenders what sort of interest rates to offer prospective home buyers.
Rather, the Fed oversees the federal funds rate, which is what banks charge each other for short-term borrowing. But when the federal funds rate rises, it tends to indirectly drive up the cost of consumer borrowing.
Because we’re looking at yet another rate hike, albeit a smaller one, you’ll need to pay attention to the interest rate you’re paying on your credit card debt. Unlike home equity and personal loans, which give you a fixed interest rate on your debt, credit card interest rates can be variable. This means they can rise and fall with market conditions, so the Fed’s latest decision could make your debt more expensive to pay off.
Try to shed your debt quickly
The sooner you’re able to pay off your credit card debt, the less money you’re apt to lose to interest charges — regardless of what rates look like. To that end, put yourself on a tight budget and aim to cut back on some non-essential spending so you can free up more money for debt payoff purposes.
At the same time, look into getting a second job. It may not be the ideal way to spend your evenings and weekends, but it is a good way to boost your income and carve out extra cash to pay off your credit cards with.
Credit card debt can be costly under any set of circumstances. But another Federal Reserve rate hike could mean you end up getting stuck paying even more interest on the money you owe. So if you’re able to shed that debt sooner, you might spare yourself a world of financial hurt.
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