Do you think it is a good idea to consolidate debts while the interest rates are steadily increasing?
According to reports, the Federal Reserve increased the interest rates again – the eighth time they did so in the past two years. When the Feds decide to increase the interest rate, you can expect that the creditors and lenders will follow with their own rates. That means if you have debts, this hike will affect you.
But how can it affect you if your borrowed your debt happened before the interest rate hike?
Well, if your debt has a variable interest rate instead of a fixed one, then you can expect that your debt will have a higher rate soon. And if you have mostly credit card debts, your creditors have every right to increase your interest rate.
Of course, you also have the right to refuse the increase in interest rate. Before creditors can increase the rate, they are required to provide you with a notice. You can call them to tell them that you do not wish to accept this increase. You can negotiate to have them maintain your current rate or lower it. If they do not want to budge, you will either close the account and pay off your balance or you can just accept the higher interest rate.
Obviously, the former is the better alternative. But how can you afford to pay off your debts so it will not be affected by the rising interest rate?
You just have to consolidate debts.
Options to consolidate debts despite high-interest rates
Before you jump into the task of consolidating your debts, you need to realize one thing first. To make this debt solution really beneficial, you have to make sure that you will get a lower interest rate. It is one of the important ways that you can improve your debt situation.
But then again, that is where there is conflict. How can you consolidate debts when the interest rates are currently rising? Is it possible to use debt consolidation and still end up with a lower interest rate?
The answer to that, fortunately, is a yes. You can consolidate your multiple debts – but your options will be quite limited. Here are the options that you have.
Choose a zero percent credit card
First of all, you can use a zero% balance transfer card. This type of debt consolidation strategy means you will apply for a new credit card that will allow you to transfer your multiple balances. While you need to pay a balance transfer fee, it can still help you save a lot of money. At least, if you know how to work this consolidation strategy to your advantage.
Usually, these cards are offered with an introductory 0% interest rate. This promo runs for a couple of months. You want to get the one that offers the longest introductory promo period so you have more time to pay off your principal balance. One of the rules of a balance transfer is to pay off your debts completely within this promo period. If you can do this, you do not have to worry about the high interest rate that is being set by the Federal Reserve. It can go as high as it can and it will not affect your debt payments.
Take out a home equity line of credit
Another option for you to consolidate debts despite the rising interest rate is to borrow a home equity line of credit. This basically gives you a revolving debt that is anchored to the equity that you have in your house. Since your house is used as collateral, this is considered as a secured debt. That means the interest rate will be lower. While this will still be affected by the rising rates, it can still work in your favor if you are mostly consolidating credit card debts. These credit cards are notorious for their high interest rates. It is much higher than secured loans so if you can use the latter, you can save a lot of money when you consolidate your multiple credit card debts.
Make sure you have a high credit score
This is not really a debt consolidation strategy. However, it is helpful when you really want to keep your debts from being affected by the rising interest rates that are being set by the Federal Reserve. When you have a high credit score, that is an indication that you are responsible for your debts. That will help you get a lower interest rate on any loan or new credit account that you will open for consolidation purposes. If you are consolidating debts with a bad credit, while it is possible, will not always give you the best interest rate. So if you can postpone the consolidation, for now, you should work on improving your credit score. This means making on-time payments and never going below your minimum payment requirements.
Important debt consolidation facts you should know
As you choose the debt consolidation option that will shield you from feeling the interest hike, there are also other facts that you need to keep in mind. Even with a higher rate, there are tips that you can use to help you save more money while consolidating debts.
A longer repayment period could mean bigger payment in the end
First of all, you need to remember that the repayment period matters if you want to be successful at debt consolidation. The shorter the payment plan, the lower amount you have to pay towards the interest. Of course, the disadvantage here is you have to make bigger monthly payments. Try to analyze your current financial situation. If you think that you can afford to pay more each month, then shorten the payment period. You will not just save money, you will also get out of debt faster.
Failure to take advantage of a zero percent rate can put you back where you started
Another important fact that you need to keep in mind is taking advantage of the 0% interest rate. At least, this is for those who used balance transfer as their debt solution. According to reports, a lot of borrowers forget about the end date of the 0% introductory rate promo. If you fail to pay back at least the majority of your balance, the high-interest rate of balance transfer cards can quickly make your debt grow. So you need to make sure that your focus will be on paying off the full loan before the promo period expires.