- Many credit cards have variable rates.
- The Federal Reserve has raised interest rates, which means credit card interest will likely climb higher.
- A 0% APR balance transfer card could help you avoid paying a higher rate.
Balance transfers could help save you from rising interest costs.
Credit card interest rates have always been known for being very high, but there are ways to try to reduce the financing charges you get stuck paying if you carry a balance.
Exploring your options for lowering your borrowing costs could be even more important this year than in the recent past. Here's why.
Credit card interest rates are going up this year
If you are carrying a balance on your credit card, unfortunately repaying your debt has likely become more expensive. That's because credit cards typically come with variable interest rates.
With variable-rate debt, you don't pay a fixed amount of interest that always stays the same over time. Instead, your interest costs are tied to a financial index, such as the prime rate. If this index shows rising rates, your credit card debt becomes more expensive because your interest costs are higher.
And interest rates have gone up this year because the Federal Reserve has raised rates in an effort to fight inflation. The Federal Reserve sets a benchmark rate, or the overnight rate at which banks lend money to each other. It was set near 0% during the pandemic but has increased several times this year and further hikes are expected.
This means chances are good the interest you're paying on your card has gone up already and will soon go up again. More of your money will go toward interest with each payment as a result, and paying down debt will take longer and cost more over time.
A balance transfer could help you avoid higher financing charges
If you don't want repaying your credit card balance to become even costlier, it may be worth considering a balance transfer.
When you do a balance transfer, you can change the terms of existing credit card debt. You will need to look for a card offering a special promotional rate on transferred balances, but there are plenty of options out there. Most balance transfer cards offer a 0% rate for a set period of time. This could be around 12 to 15 months depending on the credit card you pick.
You have to pay an upfront fee with most balance transfer cards, which is equal to a percent of the transferred balance. You might, for example, be required to pay a 3% to 4% balance transfer fee. But after you do that, you are guaranteed the 0% rate for the specified amount of time.
Even with the fee, a balance transfer card can save you a lot of money on credit card interest -- especially with rates going up. The higher your current card's rate, the more a balance transfer can benefit you. And since the Federal Reserve's actions have probably made your current card cost more, locking in a 0% rate for the upcoming months could be a great move.
Of course, you will want to make sure you have a plan for paying off your debt -- ideally before the 0% rate expires. But it's definitely worth exploring your options since interest rate changes have exacerbated the issue of high credit card interest rates and things are only likely to get worse.
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