If you want to become a credit expert, you need to pay attention to the credit card rates. This is important information that will help you make better decisions about your finances – specifically how you will deal with your debts.
When you borrow money, you need to pay it back plus interest. This interest amount will vary and depend on the interest rate. If you have a high rate, that means the interest amount that will be added to what you originally borrowed will also be high. To make it simple, if you borrowed $1,000 with a 20% interest rate, the total amount that you have to pay back should be $1,200. That $200 is the interest.
In reality, the calculation is more complex than that. But that is a gist of how a high-interest rate can affect your debt situation.
So if the news reveals that the interest rates are decreasing, then that should not be a problem for you. Most likely, this will cause your payments to go down or at the very least, stay the same. But what if it reveals that the rate will increase? What will happen?
What happens when credit card rates increase?
The movement of the credit card interest rates starts with the Federal Reserve. They deliberate on the target federal funds rate and it affects the prime rate. Usually, it results in an increase in credit card APRs (Annual Percentage Rate).
Back in December of last year, the Feds raised the rate to have a range of 2.25% to 2.50%. This change made the prime rate increase to 5.50% from 5.25%. This is what’s causing credit card companies to start looking into their own rates.
The truth is, it is not just the credit card rates that are affected. This move by the Feds will also affect the rates for other types of credit – like mortgages, car loans, etc.
But among all the debts that consumers owe, the most dangerous effect comes from credit cards. There are three reasons for this.
Credit cards have the highest rates
Your credit card rates are one of the highest among all the other types of credit. It can go as high as more than 30%. Imagine if that goes up some more. Your balance will probably go up as well. That is automatic thanks to the finance charges that are added to the balance you carry over the next month. That is the second reason why an increasing rate is more dangerous for credit cardholders.
Credit cards have finance charges
The main reason why the interest rate has a huge effect on your monthly payments is because of the finance charges. This charge is added to any balance that you carry over to the next billing cycle. It is calculated using the balance and the APR of the credit card. The higher the interest rate, the higher the finance charge will be.
Credit card rates are not fixed
Finally, the rising interest rates are dangerous because credit card rates are not fixed. It will go up or down depending on how the Feds will set it. And right now, just after the increase last December, it is being felt by credit card owners. You can expect that the rates will continue to be affected by every adjustment that the Feds make.
How to react to the rising credit card rates
As you can see, you need to keep an eye out for the interest rates that are set by the Federal Reserve. The good news is, the Feds have decided that the increase would be the last one – for at least a year. Reports reveal that they will be keeping the benchmark rate within the range of 1.5% to 1.75%.
So what does this mean for you? It means you have more time to work on your finances. Although the credit card rates will still rise because of the increase last December, it will be the last for quite some time. You have at least a year before there is a possibility of it going up again.
What can you do in the meantime? Here are some tips that you can do.
Negotiate your high-interest rate
Obviously, you need to do something about your high-interest credit cards. What a lot of people don’t know, or probably are too intimidated to try, is that you can actually negotiate a lower one. If you had been good with your payments and you were never late, then call your creditor. Ask them to lower your rates. Sometimes, you can even say that you got a better offer from another credit card company. Or you can argue that you had been good at meeting your payments. Learn how to talk to them so you can work out favorable terms. You might be surprised that they are willing to relent if it means they get to keep you as a loyal client.
Pay off the balance asap
Another thing that you can do is to get rid of the balance. Cut back on your spending so you can increase your debt payment fund. Or you can try earning more If you don’t have a credit card balance, there is no need to worry about interest rates. Even if the Feds announce another increase, it will not bother you. As long as you keep your balance down to zero, you will not be affected. After all, the interest rate will only affect the balance you carry over.
Get a 0% balance transfer card
If the credit card rates increase makes it very hard for you to pay off your debts, you might want to get a 0% balance transfer card. This is a new credit card that will consolidate all your other credit accounts. It is offered with a 0% interest rate for a period of time – like 6 months to more than a year. If you can pay off your debt within this promo period, then it means you do not have to add any interest amount to it. That would save you a lot of money regardless if the interest rate on credit cards went up or not.
Change your credit behavior
Finally, you need to start changing how you use credit. It is not necessary for you to stop using it. But you need to learn how to use it with restraint. And you have to know how to pay it off properly. The key is to pay your balance in full within the grace period. The interest rate only affects the finance charges. This is the charge added to any balance you carry over to the next billing cycle. If there is no balance to be carried over, then there is no finance charge. Even if the interest rate goes up, you will not really have to worry about how it will affect your personal finances.