- The Federal Reserve is raising interest rates to combat inflation.
- Since credit card interest rates are variable, you could end up spending more on your debt next year as a result of those Fed rate hikes.
It might, and for one big reason.
At this point, it's really not a secret that inflation has been surging. Consumers all over the country are spending more money than ever to put food on the table, fill up their cars, and keep the lights on. And many have had to raid their savings or rack up scores of credit card debt in the process.
If you're in the latter camp, you might take some comfort in the fact that you're in good company. But you may also need to brace for the fact that your credit card debt might start to cost you more in 2023.
Why credit card debt could get even more expensive
The reason credit card debt is often hailed as dangerous is twofold. Unlike personal or auto loans, which commonly come with fixed interest rates attached to them, credit card interest can be variable. That means the rate of interest on your debt could rise over time.
Plus, too much credit card debt can damage your credit score, making it difficult to borrow affordably when you need to. This holds true even if you make all of your monthly payments on time.
Now, the interest rates credit cards charge tend to be high to begin with. But next year, you may find that your rate increases even more.
Why so? Well, it has to do with inflation.
The Federal Reserve is trying to cool inflation by implementing interest rate hikes. The Fed doesn't set credit card interest rates. Rather, it oversees the federal funds rate, which is the rate banks charge one another for short-term borrowing. But when that rate increases, consumer borrowing rates tend to follow suit. And so in the coming year, it won't be surprising to see interest rates across a range of borrowing products, including credit cards, increase.
What to do if you're carrying credit card debt
If you have a balance on your credit cards that's already costing you money, you can get ahead of interest rate hikes by paying it off. Oh, but wait -- you may not be able to pay it off because your savings has gone down due to inflation. And frankly, that's a lousy situation to be in.
But in that case, all isn't lost. First of all, you can still start whittling down that debt as much as possible, even if it means putting an extra $10 toward it here and $20 there. You can also try to pick up a seasonal side hustle and use your earnings to chip away at your credit card balances. In the coming weeks, many businesses are apt to need more hands on deck during the holiday rush, so you may have a good opportunity to pick up some extra work -- and money.
Otherwise, pay attention to the interest rate on your credit card debt and see if you can find ways to make that debt less expensive. One option you can potentially look into is a balance transfer, where you move your existing debts onto a new credit card with a lower interest rate than what you're paying now. Some balance transfer cards even come with a 0% introductory rate, so you might manage to get a reprieve from accruing interest for a period of time.
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