It’s been widely reported that the Federal Reserve is contemplating an increase to the benchmark interest rate in mid-March, the first of an expected three rate increases in 2017.
For credit card holders, interest rate hikes are never good news. Unfortunately, that’s what’s looming on the horizon.
Higher interest rates from the Fed ultimately translate into higher interest on your credit card debt and more money out of your pocket.
But that doesn’t have to be the case. Financial advisers suggest a variety of preemptive measures to avoid being impacted by the rising rates, or to at least soften the blow.
1. Pay off balances as quickly as possible
We’d all pay off our credit card balances now if we could, right? If you don’t have the cash to clear your cards of debt before rate hikes set in, try to pay a little more each month than you typically do, said Aaron Aggerwal, assistant vice president of credit card lending at Navy Federal Credit Union.
“If your minimum payment is $30, but you can afford to put down $40, that small bit will make a big impact down the road,” Aggerwal said.
2. Transfer balances to a zero-interest credit card
There are varying schools of thought regarding the wisdom of transferring balances to credit cards with zero-interest introductory rates.
Michael Foguth, of Michigan-based Foguth Financial Group, said it’s a savvy approach when the alternative is paying interest on your debt each month.
“Play these companies against themselves,” he said. “If you’re a consumer and you have a balance on a credit card, and you’re paying an interest rate on that balance, go out and find someone who will buy your business…Why pay 3% when there’s zero out there? When zero is out there, go after zero.”
However, Foguth urges consumers to research various offers and figure out which one is best when considering a balance transfer. Ideally, it’s one that does not charge a transfer fee.
Also be sure to check your credit score to see if you can qualify for a balance transfer card. You can view two of your scores free, updated every 14 days, on Credit.com.
Kerri Moriarty, of Boston-based Cinch Financial, also advises consumers do the math before jumping into a zero-interest balance transfer.
“Before you make the decision to transfer…calculate how much you will have to pay each month to get rid of the debt before the zero interest expires,” Moriarty said.
If you can’t pay the debt in full before that zero interest elapses, it may not be a good idea. Often the regular interest rates for these cards are higher than what you’re paying on an existing card, Moriarity said.
What’s more, balance transfer cards are designed to get you hooked. You start spending money at zero percent and forget to stop when the introductory rate is gone.
3. Consider using a home equity loan to pay credit card balances
Another option Foguth suggests is taking a home equity loan to pay your credit card debt before the interest rate hikes take effect.
There are two big reasons why this makes more sense financially than leaving the debt on a credit card. The first is that the interest on a home equity loan is tax deductible, Foguth said. The second reason is the lower interest on home equity loans.
“The interest on credit cards is often 15% to 20% and on a home equity loan it’s around 4%,” said Foguth.
But again, you must be disciplined.
“You don’t want to go back out and rack up $50,000 of debt,” Foguth said. “If you’re going to take money out on your home, you have to pay the monthly bill.”
4. Utilize your cash rewards to make even more credit card payments
One last suggestion from financial experts to help pay down your debt as quickly as possible – use your cash rewards to make additional payments, if you have a cash-back credit card.
This approach isn’t likely to make a huge dent in the average American’s credit card debt, but as Aggerwal noted earlier, every little bit counts.