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Michelle Singletary: With coming Fed rate increases, pay off that credit card debt now

 (Associated Press)
(Associated Press)
By Michelle Singletary Washington Post

The Federal Reserve just gave consumers with revolving credit card balances their top New Year’s resolution: Dump that debt ASAP.

To beat back inflation, the Fed is signaling that, starting next year, it expects to hike its benchmark rate, which has hovered near zero percent.

Any upward rate moves by the Fed can increase the costs for certain borrowers.

But don’t panic: Any rate jumps will probably be small and phased in over time, said Mark Hamrick, senior economic analyst for Bankrate.

While the implications of possible rate jumps are important for consumers, there’s no need to have a high level of fear.

“The cost of borrowing is going to rise, at least as far as we can tell, incrementally and in stair steps, not sharply,” Hamrick said.

So, what should you expect in the coming year?

Here are some answers to questions you may have about interest rates in 2022 from experts at CreditCards.com and Bankrate.

Who will be most affected by rate increases in 2022?

Any debt with an adjustable interest rate, such as credit cards, could gradually get more expensive.

If you have an adjustable-rate mortgage, or ARM, you may see the cost of your housing go up.

If you were on the fence about refinancing and it makes financial sense to do so, you may want to get that process going and get a fixed-rate mortgage now, Hamrick said.

What moves should I make if there are rate hikes?

Pay down high-cost credit card debt as soon as you can, said Ted Rossman, senior industry analyst for CreditCards.com

If the Fed’s median projection is correct and the federal funds rate rises 75 basis points, or 0.75%, next year, that would probably raise the average credit card rate from 16.13% to 16.88%, Rossman said.

At 16.13% interest, someone making just minimum payments toward the average credit card balance of $5,525 would be in debt for a little over 16 years and would pay $6,160 in interest, according to Rossman.

At 16.88% interest, retiring the same $5,525 in debt would take 196 months and cost $6,472 in interest, an increase of $312, Rossman calculated.

“The rate hikes certainly wouldn’t help, but the real issue is making only minimum payments for such a long time,” he said.

Rossman said one way to get rid of the debt faster is finding an offer for a zero percent balance transfer credit card.

The best ones offer a no-interest introductory rate for 15 to 21 months, according to CreditCards.com.

Even after you pay the upfront fee of 3% to 5% of the balance being transferred, or $3 to $5 for every $100 in debt, you could save thousands of dollars in interest charges.

Opening up a new credit card and possibly maxing it out could mean your credit score takes a hit, but you have to weigh that against the long-term benefit of digging out of double-digit debt.

“I still think it could be well worth it, but really only if you’re making progress, not if you’re viewing it as kind of a shell game to just, like, kick the can down the road,” Rossman said.

“It really is hard to build wealth over the long term if you’re paying this high of an interest rate month after month.”

Should I rush to buy big-ticket items before rates rise?

Don’t let impending interest rate increases drive your buying decision. The cost of borrowing is just one factor you should consider. You need to consider the purchase price.

In the year ending in November , used-car prices were up 31.4% and new-car prices were up 11.1%, according to the Bureau of Labor Statistics. Since the pandemic began, used-car prices are up 47.6% and new-car prices are up 12.6%.

“Any increase in auto loan rates has a very minor effect on the monthly payments, so this is not a reason to change your timetable,” said Greg McBride, chief financial analyst at Bankrate. “The limited availability and elevated price tags of what is on car lots will continue to be the big pressures on car buyers’ budgets.”

Rather than just focusing on the interest rate, McBride said, a more impactful step for would-be car buyers is to make sure their credit is in tiptop shape and to shop around and get the best deal on the car and financing.

Should I be worried about how rising rates could affect the market?

“More stock market volatility is very likely as the Federal Reserve starts to raise interest rates, but do not succumb to short-term volatility and make big changes to your 401(k) or other investment portfolios in a knee-jerk fashion,” McBride said.

As McBride pointed out, the reason the Fed is considering rate hikes is that the economy is doing better, more people are working and consumers are spending.

“Ultimately those are all good things for corporate earnings and stock prices, so it is important to hang in there and maintain a long-term focus if things get bumpy in 2022,” he said.

What will rate increases mean for savers?

Any rate increases by the Fed probably will be small and won’t significantly improve what you earn on your savings. This means that, yes, you are still going to be getting a pitiful amount of interest.

Nonetheless, keep building up your savings.

Don’t be deterred by the low rate, because this is cash you need to be readily available in case of a financial emergency.

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