The Federal Reserve raised its key interest rate from 1.5% to 1.75% yesterday, which is the highest rate since 2008. This is the first of three gradual interest rate increases expected for 2018.
The decision to raise the rate was, in part, due to a strengthened U.S. economy and strong stock market.
“Fiscal policy has become more stimulative, ongoing job gains are boosting incomes and confidence, foreign growth is on a firm trajectory, and overall financial conditions remain accommodative,” the new Chairman Jerome H. Powell said in his first news conference.
While rates may seem high, they have been at historic lows since the 2007 recession, as the Federal Reserve attempted to revive the economy. The trick now is to steadily raise interest rates back to normal levels without frightening American consumers and stagnating the economy.
The rate hike is good news for people with savings and investment accounts because the banks will pay a higher interest rate. However, the increase could lead to more expensive loans and credit card rates for those who need to borrow, particularly for borrowers who have a variable interest rate.
Those with credit card debt should be particularly wary, as the vast majority of APR rates are variable. Most card issuers will pass on this increase in the form of higher interest rates, since the interest rate on most credit cards is directly tied to the prime rate.
The average credit card interest rate has increased a full percentage point in the last year, and is expected to be raised two more times by the end of the year.
If you are worried about your credit card debt, there are a number of things you can start doing to pay down the debt. The first step is to track your monthly spending and create a realistic budget. This will help you cut back on spending and devote more funds toward paying off your debt. You will want to start paying off the card with the highest interest rate first while making the minimum payment on your other cards. Then, once that card is paid off, you can put that same money toward the card with the next highest interest rate.
Another option, particularly if you have good credit, is to transfer the balances to a credit card with a 0% interest rate. If you do this, the introductory interest rate generally expires within 6 to 18 months, so you will want to have a plan for paying off the debt within that time frame.
