Federal Reserve just gave you more reason to pay off credit cards

SAN ANTONIO – If you pay with plastic, you can expect the interest rate on that credit card to climb again. At the same time, you can earn more interest on your savings account.

That’s the result of the Federal Reserve again raising the federal funds rate to try to stifle inflation.

Wednesday’s increase was smaller than previous hikes, but the cumulative effect is taking a toll on inflation-weary consumers.

“The fact that the Fed has now raised its rate 4.5% since March, that has a big effect on your credit card bills, especially if you make minimum payments,” said Ted Rossman, an analyst with Bankrate.com.

The average credit card APR is already near 20%, and people are carrying bigger balances as they cope with higher prices.

Rossman suggests moving your balance to a card offering zero percent interest on balance transfers if you can’t pay off your cards. Just be sure to pay them off without adding more debt.

“They last as long as 21 months, and that could be a tremendous tailwind for helping you get out of debt,” he said.

The rate hike will also immediately impact home equity lines of credit, which many people use for home renovations.

The cost of borrowing to buy a house or car might be pushed higher, too. Those loans are already much steeper than last year.

The average 30-year fixed mortgage is about 6.3%, significantly higher than last year’s 3.8 percent. Mortgage rates have slipped recently from the 7% territory.

Economists do not expect anything dramatic if there is an increase in mortgage rates due to the Fed’s latest move.

As for car loans, the average five-year note is now about 6.3%. One year ago, it was less than 4%.

High car prices and higher loan rates have made car buying challenging for many consumers. Those with higher credit scores can get lower rates.

There is one upside to the Fed rate hikes. People with savings accounts have the opportunity to earn more interest.

“I think it’s a very important tip to shop around for the best yield because big banks are still offering next to nothing,” Rossman said.

Smaller banks, primarily online, offer 4% and even 5% interest on savings. Because they don’t have physical branches, they can be more competitive with interest.

The Fed could raise interest rates again at its next meeting set for March 21-22, 2023.


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