Federal Reserve Voted to Raise Interest Rates at June 14th, 2018 Annual Meeting
Now is the time to pay off your high credit card balances because credit card debt just became more expensive. In June 2018, the Federal Reserve increased the target range for the federal funds rate by .25%, up to 2%.
When the target range for the federal funds rate increases, so do credit card interest rates.
Here’s why credit card interest rates correlate with the federal funds rate:
Credit cards have variable rates. Variable rates connect to the “prime rate,” and the prime rate ties to the federal funds rate.
So, it’s like the domino effect, when one goes down, the rest follow. When the federal funds rate increases, interest rates increase with it.
If you’ve been struggling with paying your credit card bills, things could only get harder. As interest rates continue to rise, minimum payments will also be increasing. Now is the time take quick steps and learn the best strategies to counteract these rate hikes and get out of debt.
Today we will show you five methods to crush your credit card balances fast, but before we get started, let’s talk about minimum payments, something you never want to pay.
Credit card companies use minimum payments as a strategy to maximize company profits, which is why paying minimum payments is a person’s costliest option.
Let’s look at a simple equation; on a $15,000 credit card debt that has a 29% interest rate, when paying minimum payments on this account, it would take over ten years to pay off and cost over $45,000 in interest alone.
Your two best debt relief options to clear high credit card balances are the debt snowball and avalanche method, but today, we’re only going to talk about one of these two options – and that’s the winner, the debt snowball method!
1. The Debt Snowball Method Proves to be “Most Effective”
The debt snowball method, created by Dave Ramsey, was proven to be the most effective way to pay off high credit card balances, according to new research published by the Harvard Business Review.
With the debt snowball strategy, you attack the debt with the lowest balance first because that’s the fastest path to victory. “This method works by using psychological principles. When a person achieves a goal, like paying off that first credit card debt – the brain releases dopamine, and it feels good.”
Attack your smallest balance first, while continuing to pay minimum payments on all your other accounts.
Immediately after that first balance gets paid and wiped away clean, now you’ve got one less debt to deal with each month and your monthly cash-flow increases. You’ll continue to build momentum and confidence as each debt gets paid in full.
Example of How the Debt Snowball Method Works – Here’s Mike’s Credit Cards:
Account One: Bank of America Credit Card
Minimum Payment: $12.50 Per Month
Interest Rate: 25%
Account Two: Chase Credit Card
Minimum Payment: $312.50 Per Month
Interest Rate: 20%
Account Three: Chase Credit Card
Minimum Payment: $625 Per Month
Interest Rate: 29%
Mike is paying $950 per month when paying only minimum payments between all three accounts ($12.50 + $312.50 + $625). Mike decides to use the debt snowball method to clear these debts. After doing a budget analysis, Mike found a total of $1,200 per month that could be used to pay off these debts.
Mike will now start the process, first attacking his Bank of America credit card that has a balance of $500, since this is the smallest account.
Mike pays the minimum payments on his two Chase accounts, costing him a total of $937.50, leaving him with $262.50 remaining each month. The entire $262.50 gets paid towards resolving his Bank of America credit card balance of $500. At this rate, Mike ended up spending a total of $515 in total, including interest, to eradicate this first small debt within two payments.
Mike will attack the Chase credit card balance for $12,500 next. Keep in mind, over the last two months while Mike had been working to pay off his first small Bank of America debt, he had been paying $312.50 towards this account each month, bringing the balance down a bit to $12,000 even.
After paying the minimum monthly payment on his highest Chase balance, for $625 per month, Mike was left with $575 to put towards the Chase account with the $12,000 balance. At $575 per month, it took Mike another 26 months to clear this second smallest debt, paying a total of $14,869, of which $2,869 was in interest.
Two of Mike’s debts are now gone, leaving him with only one debt remaining. Psychologically, Mike knows that he’s already more than halfway over the mountain. Being able to move quickly and accomplish paying off debt fast is what makes the debt snowball method such an effective strategy for paying off debt.
Now bear in mind, Mike’s been paying the minimum monthly payment on this last Chase account over the previous 30-months, while he was attacking the other two smaller debts, so the balance was reduced from $25,000 down to around $13,313 ($5,437 that Mike paid over the previous 2.5 years went to interest).
By putting $1,200 per month towards paying off this last balance of $13,313, Mike could clear the entire amount within fourteen months – and is now free from all credit card debt and paying ZERO dollars in interest, even after this most recent rate hike.
If your balance is zero, you pay zero dollars in interest, no matter how much the rate increases too. That is why it’s imperative for a person to pay their credit card balances in full when the bill arrives, and you’ll never pay any interest.
2. Balance Transfer Cards Can Give You an Opportunity to Eliminate Interest
You can slash your interest rates on credit cards, by using a balance transfer card that has no interest for 12-18 months. If you can pay your balance in full on the balance transfer card during the introductory rate period when the interest rates at zero, you’ll end up eliminating 100% of the interest and only having to pay the up-front fee for the balance transfer card.
Shop around for a balance transfer card that comes with:
•low up-front fees
•low to no interest during the intro-period
One last tip to remember: Make sure to keep your credit cards open after paying the balances in full because a person’s credit score will go down after they close a credit card.
3. Home Equity Line of Credit to Eradicate High-Interest Credit Cards
A home equity line of credit can be used to pay off high-interest credit card debt, saving a person thousands of dollars in interest. A home equity line of credit will typically come with a lower interest rate than any other type of bank loan. BankRate.com estimated that the average interest rate on a home equity line of credit is 5% in 2018.
The downside to using a home equity line of credit to pay off credit card debt is that you’re switching an unsecured debt to a secured debt, risking losing your property over a credit card debt if you were ever to stop paying it.
4. Get Your Creditor to Reduce the Interest Rate
All you need to do is pick up the phone and call your credit card company.
Ask for a supervisor before starting your pitch because a supervisor will surely have the authority to change the terms of your credit card agreement and interest rate.
Spend some time reviewing your past payment history with your creditor, especially if you’ve had a flawless payment history with them.
Let them know you were approached by another creditor who was offering you a lower rate on a similar card but, one that has higher rewards and cash-back options. Express your need for this type of offer, but that you’d rather stay with them if they’d be willing to reduce your interest rate from 15% down to 8%. Shoot for a lower amount than what you’re hoping for because in negotiations the ending verdict is usually an amount somewhere in the middle of both sides.
5. Debt Relief Programs to Avoid Bankruptcy (the Last Resort)
A consumer credit counseling program can reduce your interest rates and get you out of debt faster. Consumer credit counseling plans get you out of debt in around 4.5 years. Your monthly payment will stay around the same as what it was when paying the minimum payment amounts.
With consumer credit counseling, you only make one payment each month to the company.The company will then disburse each monthly payment to your creditors but at the reduced interest rate. This type of credit card relief program comes with the least adverse effect on a person’s credit, compared to any other debt relief program.
If you can’t afford to pay at least minimum payments each month, financial hardship programs include debt settlement and debt validation.
Both options require your accounts to go delinquent to the point where they get written-off by the original creditor and sold to a third-party debt collection company. At that point, debt negotiators go in and negotiate a reduction in the balance, or debt validation can dispute the validity of a debt.
These programs can be beneficial if you’re contemplating bankruptcy because bankruptcy has the worst effect on a person’s credit score, compared to any other debt relief option.
Paul J Paquin is the author of various debt relief and credit repair guides across the internet and the CEO at Golden Financial Services where they offer national debt relief programs.Paul assimilates his experiences from Golden Financial Services, into his writings, sharing expert tips and insight on how to get out of debt, improve credit scores and save money.
Check out Paul’s latest blog posts at GoldenFS.org/Debt-Relief-Blog/.