The Fed Raised Interest Rates… What Does That Mean for You?

A few weeks ago, the Fed raised interest rates by a quarter of a point.

It was the 6th increase in interest rates since December 2015. And experts predict two or three more increases to come later this year.

So what does that mean for you, the American consumer?

Well, it could worsen an issue that most Americans already face. Credit Card Debt.

Debt Can Be a Killer

Most credit cards have variable-rate debt. This means that the interest rate hikes will increase the percentage you are paying back each month.

Many U.S. citizens are only able to make the minimum payment each month. And instead of making any progress, they end up falling farther and farther behind each month.

The stress this causes can take a toll. In fact, a study by the Federal Reserve Bank of Atlanta recently proved this. They found that that there’s a link between having seriously overdue debt and health risks.

The average credit card interest rate is almost 17 percent. If you have a credit card balance of $10,000, this current interest rate hike will add about $25 to your bill each month.

If you’re facing debt as most Americans are, increased interest rates mean less money in your pocket.

The Battle to Control Inflation

So, you might be wondering, why does the government raise interest rates now and then? Mainly because it wants to nip inflation in the bud.

As consumers buy more, prices increase. As prices go up, workers start demanding higher wages. As wages go up, consumers buy more. The cycle continues and suddenly inflation is a big problem.

Slowing down consumer consumption may seem bad for the economy. But it’s really good. It keeps inflation in check.

Here’s what Martin Shields, Colorado State University’s regional economist, said. “There is evidence that shows people eventually do respond to higher interest rates by borrowing less and spending less.”

Now, on the plus side, a rate hike is an indication the government believes the economy is doing well. And will continue to do so for the foreseeable future.

McBride describes it as “a vote of confidence in the economy.” He says it’s nothing to worry about, but it may be time to “take action.”

Because knowing that it’s good for the economy as a whole doesn’t take away the sting of having to pay back more every month on your debt.

What Can I Do About the Hike?

Here are steps you can take to minimize the negative effects of a rate hike, according to CNBC.com:

  • Switch to a fixed-rate mortgage. With an adjustable-rate mortgage, you can get hurt by interest rate hikes. You might not notice it immediately, but you will feel it after two or three more of these predicted hikes.
  • Keep some of your money liquid. Look for savings accounts that offer the highest interest rates. But be careful you’re not locking your money up for longer than you want to.
  • Don’t make impulsive decisions. This is easy for some people but difficult for others. If you’re going spend a lot of money on something, spend time thinking about it beforehand.
  • Pay more than the minimum on credit card debt. Easier said than done, right? But take a look at the options listed below to see if any of them appeal to you.

Avalanche or Snowball? Take Your Pick!

One option for those struggling with debt is a debt consolidation loan. It might be worth looking into. Another is a home equity loan, while a third is a cash-out refinance.

CNBC.com also offers a couple of other interesting approaches to get on top of your credit card debt:

The 1st approach is the Avalanche Method. List your debts from highest to lowest by interest rate. Pay the minimum balance on each. Then dedicate as much as you can each month to the one with the highest interest rate. Mathematically, this is the most effective way to eliminate debt.

The 2nd approach is the Snowball Method. List all of your debts from smallest to largest. Pay the minimum balance on each one, except the smallest. For that one, pay as much as possible each month until the debt is gone. Then move on to the second-smallest debt and so on. Paying off a credit card in full will motivate you to do the same for others.

Taking a smart approach to reducing your debt is the best thing that you can do to protect yourself. Especially when interest rates are expected to continue to rise over the near future.

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