Credit card debt is notoriously difficult to pay off because of high-interest rates. With the Federal Reserve set to increase rates, it is about to get more difficult for many consumers.
How are interest rate hikes likely to impact credit card debt?
Federal Reserve benchmark rate
The Federal Reserve is in charge of making adjustments intended to encourage spending when inflation is low and slow spending when inflation is high. It accomplishes this by either raising or lowering the Federal Reserve benchmark rate, which is the rate that banks charge other banks for overnight lending to satisfy Federal Reserve requirements. When the benchmark rate goes up, the interest rates consumers and businesses pay also increase.
How the benchmark rate affects credit card debt
Most credit card interest rates are variable rates based on the prime rate plus a set percentage. When the benchmark rate goes up, the prime rate goes up as well and consumers pay more interest on credit card balances.
What consumers can do
Consumers carrying credit card debt can call their credit card companies to ask for a lower rate. They may also want to consider consolidating debt with a lower-interest personal or home equity loan or transfer balances to a lower-interest balance transfer credit card. However, consumers who are already having trouble making minimum payments may need to consider filing bankruptcy.
If you are struggling with credit card debt, now may be the time to begin exploring your options before higher interest rates go into effect.