Rising interest rates mean that monthly credit card payments are likely to rise sharply this year as annual rates rise, increasing the time it takes to repay the balances.
According to the Federal Reserve, 84% of Americans have at least one credit card and half of them have a balance from month to month.
ABC News chief business correspondent Rebecca Jarvis analyzes what consumers need to know.
Editor’s note: Jarvis’s replies have been modified for clarity.
As the Fed raises interest rates in an effort to curb inflation, how is credit card debt affected?
Jarvis: It affects everyone. If you have a credit card balance from month to month, it means that you will pay more every time the Fed raises interest rates. With each rate increase, APR credit cards (annual interest rates) increase, so you could see even the most recent interest rate increase appearing in the current billing cycle.
Give us an example. How much will this cost people?
Jarvis: It has a significant impact. Suppose you have an average credit card balance of $ 5,525 and pay 20% APR. If you only make the minimum payments, about 2% of the balance, you will need more than 58 years to repay your credit card. This will cost you almost $ 24,750 in interest.
If the APR jumps to 21%, it will take 76 years to repay the same balance, costing you more than $ 34,400 in interest.
How can cardholders prevent this scenario from happening?
Jarvis: Because we know that rates are rising, this will only become more expensive.
The first thing you can do: Stop taking on new credit card debt. Gather a budget and apply any disposable income to pay off your debt.
Focus on making bigger monthly payments. The difference between $ 50 in interest for your monthly bills and $ 100 in your monthly bills can be years and thousands of dollars in interest.
What about transferring your balance to a zero percent APR card?
Jarvis: It may work, but there may be many reservations. First, you must meet the requirements. Then you need to make sure the benefits outweigh the costs. Many cards charge a balance transfer fee of about 3%.
Finally, and most importantly, this can not be an incentive to take on more debt. The zero interest rate APR lasts for a set period of time, usually one or two years at most, so cardholders must continue to make timely payments.
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