The Federal Reserve raised the federal funds rate for the third time in late 2017, pushing it to a target range of 1.25% to 1.5%. This means interest rates on loans will rise for consumers, but it also signals that the U.S. economy is improving. The Federal Reserve predicts the U.S. economy will continue to improve for the foreseeable future and is expected to raise rates three or more times through 2018 and 2019.
Unfortunately, a higher federal funds rate—commonly referred to as the federal interest rate—means higher interest charges on most loans, including credit cards, auto loans and variable-rate mortgages. This is because banks will pay a higher cost for borrowing money, and that cost is passed on to customers.
Credit card interest rates are directly tied to the federal interest rate. In fact, interest rates on most credit cards are calculated by adding the "prime rate" (another word for "federal interest rate") to a set annual percentage rate (APR). So, if your credit card terms state that your APR is the "prime rate plus 15%" and the federal interest rate is 1%, then your APR would be 16%.
If you don’t have credit card debt and pay your credit card bills in full each month, you won’t need to worry about the federal interest rate hike. Interest is only charged to credit card accounts that carry a balance from month to month.
If you carry a balance, here are a few options for reducing interest charges on your credit card bill.
Get a balance transfer card with a 0% APR. If you can’t pay off your credit card debt in the short term, consider opening a balance transfer credit card. These allow you to transfer debt from an existing card to a new account, and you won’t pay interest for a certain period of time. The interest-free period is generally between 12 and 24 months, and you’ll typically pay a balance transfer fee of 3% to 5%.
Be sure you pay off your balance in full before the promotional period ends. When the 0% period expires, the remaining balance is subject to the interest rate you were approved for when you opened the account.
When you open a new credit card, the card issuer will check your credit, which creates a hard inquiry. This may temporarily lower your credit score. The effect will be minimal, as new credit only accounts for 10% of your total credit score. Making on-time payments and adding the credit line should improve your credit score over time.
Ask your bank to lower your interest rate. If you don’t want to open a new credit card account, ask your bank to lower your interest rate. Your bank may be willing to work with you if you have consistently paid your credit card bill on time and showed that you’re actively working on paying down your credit card balance, or you’ve improved your credit score over time. Visit your bank in person or call the phone number on the back of your card.
Your bank will usually give you an answer after checking your payment history in their system. Still, it’s a good idea to come prepared. Have a copy of your credit report and a few credit card statements with you that show you’ve made consistent on-time payments. Use these documents as reference points when stating why the bank should give you a better interest rate. Generally, your bank will not add an inquiry when lowering your APR.
Restructure your budget so you don't carry a balance. Reassess your spending to avoid future interest charges. Create a realistic budget that you can stick to every month, and cut expenses where you can. For example, if you usually go out for lunch, start packing your lunch daily. If you already have credit card debt, factor debt payments into your budget.
One common way of budgeting is to create "buckets" for each expense. Give yourself a set amount of money to spend on different types of expenses; for example, $500 for groceries, $1,000 for rent and $200 for entertainment. Save or pay down debts with whatever money is left at the end of the month, and give yourself a leg up on responsible finances.
Maxime Rieman is Product Manager at ValuePenguin. Educating and assisting shoppers about financial products has been Rieman's focus, which led her to joining ValuePenguin, a consumer research and advice company based in New York. Previously, she was product marketing director at CoverWallet and launched the personal insurance team at NerdWallet.
© 2021 Newsmax Finance. All rights reserved.