Years ago, I didn’t pay attention to any of the annual percentage rates on my credit cards, and I ended up in debt. And that was during a time when the economy was robust and credit card APRs were low.
Fast forward to 2018. Right now, the economy is going well. But the smooth credit ride is about to change, which makes this an especially dangerous time to be vague about your credit card-related details.
Here’s why: On June 13, the Federal Reserve increased the federal funds rate for the second time this year. The federal funds rate is the interest rate that banks charge each other when they lend Federal Reserve funds overnight.
How does this affect you? Increases in the federal funds rate translates into increases in the prime rate. This is a big deal, because when the prime rate — which is the rate a bank charges its best customers — goes up, the APR on your credit card goes up by the same amount. Two more hikes in the federal funds rate are predicted for 2018, so this is cause for concern.
Understand What it Means for Your Wallet
Simply put, if you’re in credit card debt and your credit card’s APR goes up, you’re going to pay more in interest. And not being aware of the potential damage only makes things scarier.
According to a recent U.S. News survey, more than half of consumers with credit card debt aren’t sure how much they’re paying in interest. And 22 percent didn’t even know their credit cards’ APR.
Don’t be in the dark about your credit life. Hop online today and review the terms of your credit cards. Know your credit cards’ APRs and figure out how much debt you have. Listen, if you’re in debt, the situation isn’t going to get better. It’s only going to get worse.
[Read: The Best Rewards Credit Cards of 2018.]
But don’t panic! Take a few deep breaths and will yourself into a “get out of debt” mindset. There are several ways to attack your debt.
How to Take On Your Debt
Use a balance transfer credit card. If you still have a pretty good credit score, you can transfer your balance from a high-interest card to a credit card that features a zero percent APR introductory offer on balance transfers. During this intro period, you get to make monthly payments on the principle without having to pay any interest.
If you feel like you’re drowning in debt, getting a balance transfer credit card is like climbing onto a life raft. Your debt stops growing while you’re making payments on the balance.
Right now, the introductory offers on the best balance transfer cards range from 15 to 21 months. Figure out what your monthly payment has to be to get out of debt during the intro period.
But here’s the thing. Don’t use this card for new purchases. You can’t pay off debt if you’re trying to hit a moving target.
Pick a debt-elimination strategy. If you don’t qualify for a balance transfer credit card, just get out of debt the old-fashioned way. Here are three strategies to consider:
— Debt snowball: Rank your credit card balances from the smallest debt to the largest amount. Focus on paying off the credit card with the smallest balance first while you pay the monthly minimums on your other cards. This gives you an adrenaline rush because you knock off one of your debts quickly.
— Debt avalanche: Rank your credit card balances from the highest APR to the smallest APR. Pay off the credit card with the highest APR first to save the most money. In the meantime, you pay the monthly minimums on your other cards.
— Debt blizzard: This is my own debt-reduction recipe that I used when I had debt many years ago. The first card you pay off is the smallest balance to get that quick emotional lift. Next, you switch to the avalanche method and start with the card with the highest APR. So from that point on, you save the most money. And as noted with the other strategies, you continue to pay the monthly minimums on your other cards.
[Read: The Best Starter Cards for Building Your Credit.]
Take out a debt consolidation loan. This is a good option for those who have balances on several credit cards with high APRs but who still have a score in the fair-to-good territory, which is at least 660 (more or less). You don’t qualify for the best balance transfer cards, but you might find a personal loan with a lower APR than the ones you’re paying now.
This strategy simplifies your life. You combine your debt into one loan. You make one monthly payment instead of the seven or eight you’re making now. Bonus points: You’re trading revolving debt for an installment loan. This has the potential to boost your credit score.
Debt-proof your future. Consumer revolving debt (mostly credit card balances) in the U.S. at the end of April 2018 was $1.03 trillion. This was a $2.2 billion increase over March 2018.
Don’t be a part of this. With more interest rate increases on the horizon, you need to make sure that once you get out of debt, you stay out of debt. Here are a few ways to make sure you hang onto your financial freedom.
— Set up a budget: Track your spending so you stay on track.
— Know your APR on your credit cards: A high APR, if nothing else, will scare you into paying your balance in full every month.
— Maintain an emergency fund: This is not an option. Trust me, you’ll need it. And here’s where rising interest rates actually help. You’ll find higher interest rates on savings accounts.
— Keep a low-interest credit card on hand: When you have an emergency, like a leaky roof or a deductible on medical expenses, this gives you a short-term loan option that won’t ruin your financial life.
[Read: The Best No-Annual-Fee Credit Cards of 2018.]
There is one more strategy, but I only recommend it for those who still have an excellent credit score. You can always negotiate with your credit card company for a lower APR.
But don’t try this if you have a less-than-stellar credit history. I’ve heard from folks who tried this and it backfired. Not only did they not get a lower APR, but they also got either a higher APR or a lower credit limit. The lesson here? Don’t call attention to yourself unless you can pass credit muster.
The main thing to remember is this: As long as you keep a low balance and pay your bill in full and by the due date, you’ll be safe. Stay on top of things, and you won’t have to worry about debt at all.
More from U.S. News
The Pros and Cons of Credit Cards
How to Apply for a Credit Card the Right Way
Here’s Why Your Credit Score Might Fall
Why It’s Crucial To Know Your Credit Card’s APR originally appeared on usnews.com
