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Offbeat Why Fed rate hike can drive you to pay down credit cards

14:15  14 june  2018
14:15  14 june  2018 Source:   usatoday.com

Fed rate hike will add $2.2 billion in credit card interest charges

  Fed rate hike will add $2.2 billion in credit card interest charges The U.S. central bank is expected to hike its key interest rate another quarter of a percentage point Wednesday. And that means higher interest rates on credit cards.That also means cardholders soon will be forking over even more money in interest payments annually, an estimated $2.2 billion alone for what’s expected to be the Federal Reserve’s second rate hike of the year, according to the June Credit Card Debt Report from CompareCards. And if the Fed raises rates two more times this year, it will boost interest paid on credit cards to roughly $10 billion in 2019, the report said.

0% intro credit cards is another way to save money while paying down principle on credit cards that accrue interest. Last Thoughts on June 2017 Fed Rate Hike on Credit Cards . Credit Cards Before Debit Cards 7 Reasons Why March 24, 2018.

A rate hike might not come right away: CNN points out that Fed chair Janet Yellen wants to see higher wages along with lower unemployment. The reason why is because most of us these days have variable credit card interest rates , with our APRs tied to the prime rate .

For roughly a decade, millions of consumers could afford to focus on the rewards and ignore the rates on their credit cards.

"They haven't really had to think too much about interest rates because they didn't change that much," said Robert A. Dye, chief economist at Comerica Bank.

Game over. Get ready for higher rates on your credit cards after more rounds of Fed rate hikes this year and next. Many consumers may not realize it but the interest rates on credit cards aren't fixed. Most credit cards have what are called "variable rates."

Why your budget will feel the Fed's next rate hike

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Consistent rate hikes over time by the Fed could eventually price some buyers out of the market. Most interest rates on credit cards are variable and are often tied to the prime rate , just like HELOCs. That will attract more investors into Treasuries, driving their prices down .

The Federal Reserve is raising its benchmark interest rate to reflect a solid U.S. economy and signaling that it’s sticking with a gradual approach to rate hikes for 2018 under its new chairman, Jerome Powell. (March 21) AP.

As a result, the interest rate consumers pay on credit card debt typically ticks up each time the Federal Reserve raises rates.

On Wednesday, the Fed raised rates by a quarter-point once again. The target range for the federal funds rate will be 1.75% to 2%. A rate hike by the Fed translates into a higher prime rate.

The Fed said economic activity has been "rising at a solid rate."

"Recent data suggest that growth of household spending has picked up, while business fixed investment has continued to grow strongly," the Fed said in a statement Wednesday.

As a result, consumers can expect higher rates on credit cards, home equity lines of credit and other adjustable-rate loans.

"Consumers will need to be more savvy about their spending and how they finance it as a result of rising interest rates," Dye said.

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Higher interest rates from the Fed ultimately translate into higher interest on your credit card debt and more money out of your pocket. Another option Foguth suggests is taking a home equity loan to pay your credit card debt before the interest rate hikes take effect.

Borrowers with good federal loans don’t have anything to fear from Fed rate hikes — their rates are locked in. Credit card rates will be worst of all. You constantly hear that paying down credit card balances should be your first priority no matter what your station in life is.

If you don't pay off your credit card every month, you're looking at slightly higher monthly minimums and higher annual percentage rate on the credit card balance.

In many cases, higher interest rates can hit in the first billing period after a change in the prime rate. Bank policies vary; some can change quarterly.

"When the Fed raises rates, the APR on your credit card is going to rise pretty quickly," said Matt Schulz, senior industry analyst for CreditCards.com.

The price tag for the latest Fed rate hike will be an extra $1.6 billion this year alone for consumers who are carrying debt on their credit cards, according to an analysis by WalletHub.

And that's the added cost of just one rate hike. Many economists expect two more rate hikes in 2018. And many are forecasting another three rate hikes in 2019.

Consumers began the year with more than $1 trillion charged on their credit cards for the first time ever. But consumers did repay $40.3 billion in credit card debt during the first quarter — the second biggest quarterly payout ever, according to Jill Gonzalez, analyst for WalletHub.com.

Here's what the Fed rate hike actually means for you

  Here's what the Fed rate hike actually means for you If you're concerned about what an additional increase in the Fed's benchmark rate will mean for your mortgage or credit card, as well as student debt, home equity loan and car payment, here's a breakdown of what's in store — and what you should do about it. Credit cardsFor starters, credit card rates are already at a record high of 17 percent on average, according to Bankrate.Most credit cards have a variable rate, which means there's a direct connection to the Fed's benchmark rate, and as interest rates rise, card holders will continue to get squeezed.

Most credit cards these days have a variable rate , which means there's a direct connection to the Fed 's benchmark rate . "If you are carrying any sort of balance, you will immediately feel the effects of [a quarter-point rate hike ] and pay more interest," said Kimberly Palmer

The Fed ’s four hikes of its target range for the federal funds rate in this cycle cost consumers with But many households do not carry interest-bearing credit card debt; they pay their cards off in full every month. Wolf, Why call it “ credit card balances” when the correct term is “ credit card DEBT”?

Many times, consumers use their tax refund cash or a year-end bonus to pay down debt in the beginning of the year, she said. But this year, consumers appeared to act more aggressively to tackle their debt.

"People are realizing they're not keeping up with their bills. They're falling behind," Gonzalez said.

About 41.2% of all households carry some credit card debt, according to a recent study by ValuePenguin, a consumer data website. Researchers found the median debt per American household to be $2,300, while the average debt stands at $5,700 based on the most recent data from the Survey of Consumer Finances by the U.S. Federal Reserve. This information comes from data collected up through to the year 2013.

The average credit card debt for those younger than 35 was $5,808 but credit card debt goes up significantly for other age groups, according to the study.

Consumers age 35 to 44 had an average credit card debt of $8,235. Consumers age 45 to 54 had an average credit card debt of $9,096.

In metro Detroit, the average credit card debt was $5,367 in 2018 — up from $4,942 five years ago. That's an 8.5% increase in the past five years and a 4% jump since 2016, according to ValuePenguin.

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How the Fed 's interest rate activity affects your credit card interest. For example, the target range is currently 1.00%-1.25%, which is why the Prime Rate is 4.25%. In simple terms, this means that you should expect your credit card interest rates to increase by 0.25% as a result of the Fed 's rate hike .

Borrowers with good federal loans don’t have anything to fear from Fed rate hikes — their rates are locked in. Credit Card Rates Will Be Worst of All. You constantly hear that paying down credit card balances should be your first priority no matter what your station in life is.

Kurt Rankin, economist for the PNC Financial Services Group, said consumers overall are confident in their job prospects and the potential for higher wages, given the low unemployment rate.

As a result, they've been comfortable taking on more credit card debt in recent years. In general, consumers shouldn't be feeling overburdened by the level of credit card debt they're carrying, he said.

Even so, some are concerned that balances could become more difficult to manage for some consumers as rates increase in the next year or so.

"Some consumers will pay their debt more quickly," Dye said. "Others will start to feel more stress as their debt balances become more difficult to manage."

"What I am concerned about is how consumers will handle the added financial stress when job growth cools," Dye said.

Here's a look at useful strategies to deal with the higher cost of credit card debt:

Transferring to a lower rate card remains an option

The average rate on credit cards is 16.75% but the average could go up to 17.5% in the next year, according to CreditCards.com.

While rates on variable rate credit cards have gone up, credit card issuers are still offering 0% rates for a limited time, such as a 18 months or 21 months, that can allow a consumer to pay off their debt more quickly.

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Credit card balances, home equity lines of credit , adjustable- rate mortgages to be hit by Fed hike . All of those revolving loans have variable rates that go up or down based on the Fed ’s benchmark short-term rate . which it raised by a quarter percentage point.

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"A balance transfer card, if used wisely, can save you an awful lot of money," said Schulz, of CreditCards.com.

Wisely, of course, would mean using that zero percent window to pay down the debt you already built up — and not take on more debt.

"Ideally, you'd be able to pay off that entire balance within that introductory period. But that's not reality for a lot of folks," Schulz said.

Look for a card with a low balance transfer fee. Some credit cards are pushing those fees to 5% — which means you'd pay $500 on a $10,000 balance transfer.

Pay attention to the length of the zero percent introductory offer — and get a clear idea of what rate you'd pay afterwards. Typically, you'd not be able to transfer a balance from one card to another card being offered at the same bank.

Shopping around for a better rate is essential

Already, credit card issuers appear to be less likely to target a mass audience by offering rewards to anyone who comes along. They don't want to just sign up credit card rewards gamers or consumers who sign up for new cards to get bonus rewards.

Instead, card issuers want to offer incentives to current customers or others who are more likely to use the card for a long time, Schulz said.

"Basically, banks want you to keep the card you get and to hang around," Schulz said.

If you get an offer for a lower rate from another bank, it does not hurt to reach out to your bank to ask if they'd match that rate.

"They'll almost certainly listen to you and your chances for success are higher than you might think," Schulz said.

Researching different offers from the same bank can pay off

The bonus rewards or special deals that you spot in a bank branch can vary from what the same bank is offering online or via the mail that arrives at your house. Seriously.

I made this mistake myself and lost out on a rewards offer by signing up at the bank branch before looking into what was offered as a sign-up bonus online.

It's best not to be impulsive and swing at the first pitch. Take time to review any offers and compare what's being offered in other channels.

Contact Susan Tompor: stompor@freepress.com or 313-222-8876. Follow Susan on Twitter @tompor.

After 9 years of economic recovery, Fed's anxieties finally fade .
The Federal Reserve is guiding a U.S. economy that is as close to ideal as it could have dreamed a decade ago, when the darkest days of the recession forced it to take big risks to protect workers, banks and economies around the world from further devastation. After nine years of steady if uneven recovery, the United States is now growing at a pace topping 4 percent, unemployment is as low as it's been this century, and inflation has safely edged up toward an official target.While a few items remain on the U.S.

Source: http://us.pressfrom.com/news/offbeat/-155187-why-fed-rate-hike-can-drive-you-to-pay-down-credit-cards/

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