The Fed Raises Interest Rates: 5 Reasons to Consolidate Your Credit Card Debt Now

The Federal Reserve, also known as the Fed, is raising interest rates to combat inflation, and that means that your credit card balances could be about to get more expensive.

On September 21, 2022, the Fed announced its third consecutive rate hike of 0.75%. According to CNN, "That's the highest the fed funds rate has been since the global financial crisis in 2008." These increases are good news for savers, who should be able to expect higher returns on their savings. 

But for consumers who are currently carrying credit card debt, the news is less encouraging. The Fed’s interest rate hikes may result in higher interest charges on your credit card debt and, as a result, a more difficult time paying back what you owe.

Fortunately, there is a way to get around this potential increase in the cost of your debt: credit card consolidation. Read on to find out why consolidating your credit card debt might be a good idea in the current environment of rising interest rates.

How Do Rising Interest Rates Affect Credit Card Debt?

Many credit cards come with a variable interest rate. A variable interest rate means that the interest charged is pegged to the prime rate. The prime rate, in turn, is linked to the federal funds rate (which is what the Fed essentially increases when it raises the interest rate). 

In a nutshell, when the federal funds rate goes up, the prime rate tends to go up as well, with credit card interest rates often following suit.

Typically, you can expect to see a higher APR on your credit card statement within one or two billing cycles. According to Experian, the Fed’s recent 0.50% interest rate hike will likely lead to a 0.50% bump on your credit card’s APR. So, if your current APR is 16%, for example,  you can expect it to rise to 16.50% in one or two billing cycles.

If you don’t carry a balance on your credit card, you don’t have to worry about any of this, of course.

What are the Benefits of Paying Down Credit Card Debt?

Simplifying and paying down your credit card debt can have a number of benefits. Here are several to consider:

You could save money on interest

If you have a good credit score, you may be able to get a lower interest rate with a personal  loan than the one you’re currently getting on your credit cards. This will reduce the overall amount you’ll pay in interest over the lifetime of the debt.

You could pay down your debt faster

When the interest charges on your credit card increase (for example, as a result of a Fed interest rate hike), it means that a larger portion of your monthly payments will go towards interest rather than the principal. This may lengthen the time it takes you to get out of debt.

However, if you’re able to reduce your interest charges through a personal loan, it means that a larger portion of your payment will now go towards paying off the principal. This could help you pay off your debt more quickly.

You’ll have one monthly payment instead of multiple ones

Using a single low-interest personal loan to pay off high-interest debt can help you simplify your financial life. When you consolidate credit card debt, you'll only have one monthly payment and due date to keep track of.

You can then devote all of your time and attention to making that single payment on-time, counting down the days until your debt is completely paid off.

It can reduce your monthly payment amount

If you’re able to get a personal loan that has a longer repayment period, this can reduce your minimum monthly payment amounts, thus making them more manageable.

The downside? A longer repayment period may also increase the total amount of interest you pay over the term of the loan, even if you are able to get a lower interest rate. You can work around this, however, by paying more than the minimum monthly payment whenever possible.

It could boost your credit score

A personal loan can help boost your credit score in a couple of ways.

First, paying off or reducing your credit card balance using a personal loan can lower your credit utilization ratio. A lower credit utilization ratio (ideally one below 30%) can significantly improve your credit score.

Second, if you keep making your loan payments on time, you’ll build up a good payment history, which will also help your credit score in the long run.

Are There Any Drawbacks?

While consolidating credit card debt has several advantages, it is not without some potential drawbacks. Here are a few to look out for:

• Potentially higher overall costs: using a loan to pay credit card debt might come with expensive hidden fees that could ultimately cancel out any potential interest savings on your credit card debt. Before you sign up for a loan product, read the fine print carefully to make sure you fully understand its true costs.
• Potentially higher interest rates: If your credit score isn't in great shape, you might not be able to get the best interest rates. You may, in fact, end up getting a higher rate than the one you currently have on your credit card. A higher interest rate not only makes it more difficult to keep up with your payments, but it also means that you could end up paying more interest over the term of the loan.
• Property loss: personal loans fall into two main categories: secured and unsecured. A secured loan is one where you pledge an asset or property, such as a car or house, as collateral. If you default on a secured loan, you could lose your home or car.  An unsecured loan, on the other hand, is not secured by any collateral. 
• The potential for scams: As the demand for personal loans rises, scams are also becoming common. Do your due diligence. If an offer sounds too good to be true, it probably is.  

A Better Way to Pay Off Credit Card Debt

The Federal Reserve's recent interest rate hike coupled with rising inflation puts additional strain on consumers who are currently burdened by credit card debt.

If this sounds like you—and if you’re looking for help paying off and eliminating your credit card debt by using a single low-interest loan that can be paid off faster—Happy Money® may be able to help. Check out The Payoff Loan™ to learn more and check your rate—all without impacting your credit score.