You might have heard that the Federal Reserve raised the federal funds interest rate another 0.25% recently. That puts this rate at 2.0%. (It is expected to rise to 2.5% by the end of the year and to 3.5% by 2020.) As the Fed rate increases, so does the prime rate that banks use for lending. And, credit card rates are tied to the prime rate. So, an increase in Fed interest rates directly leads to an increase in credit card rates.
About half all households carry credit card debt and the average debt level per household is about $16,000. So, each 0.25% of increase in interest costs a household $40 per year. This means that the projected increase from the previous level (1.75%) to the forecast 2020 level (3.5%) will cost the average household with credit card debt about $280 per year. While that’s not a ton of money, why throw it away?
Okay, so rates are going to rise which will increase the cost of credit card debt. Even if we neglect that increase, credit card debt is probably the costliest kind of borrowing that you can do. Assuming a credit card rate of 17% on a balance of $16,000, you’ll be paying $2,720 per year in interest. Now for most of us, that’s serious money.
Since credit card rates are already high and are rising, it probably makes sense to pay down this debt as rapidly as possible. Once you’ve done that, you’ll be in a position to reap additional dividends. Take the monthly credit card payments you’ve been making and put half of it into a rainy-day fund. Use the other half to pay off current balances on your credit cards so you can avoid any credit card interest.
If you’d like to see how you can retire your credit card debt or discuss any other financial questions you might have, we’d be happy to talk with you in a no-charge, no-obligation initial meeting. Just visit our website or give us a call at 970.419.8212 to learn more.
This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products. Please consult your tax or investment advisor for specific advice.