What Does the Fed’s Rate Hike Mean for Your Credit Card Debt
There’s a lot going on in the economy right now, including all this news about the Fed raising interest rates . The details can be confusing, but you really need to know how it will affect you as a consumer. Here’s what raising your debt means (and what you should do about it).
There has been a lot of talk about exactly when the Federal Reserve will raise interest rates. In short , it will affect many things, including your loans and your debts.
Economist Megan Green told NPR that credit card holders will be the hardest hit. She explains:
… some borrowers will find it even harder than others because some debts are tied to short-term rates that are very closely tied to the Fed’s rates. Other debt is tied to a long-term rate, which is less tied. So I think credit card debt holders are the biggest losers from the Fed hike. Most credit cards are floating rate cards, so these rates are tied to the Fed’s discount rate. And also those who demolished their homes in exchange for a loan, they will feel the impact of the Fed’s rate hike. They will also find it more difficult to service their debt. Things like fixed mortgages, auto loans, and federal student loans are tied to a long-term rate, so the impact of the Fed’s rate hike won’t hit them as quickly.
Her advice? If you have a lot of credit card debt, now is the time to focus on paying off before the rise begins. If you’ve used the snowball method to pay off your debt, you might consider switching to a stack method that is more interest-oriented. (Although research does show that the snowball method is incredibly effective for paying off debt in general.) And if you have “stumped” your home to get a loan, you should try to finance that loan or pay it off too.
According to her, the Fed will probably not raise rates until the end of the year, but it is important to know what that means now so that you can prepare accordingly. We’ve shown you how Fed interest rates affect other areas of your finances as well, so be sure to read our tutorial on this and watch the rest of Green’s NPR interview at the link below.