How to Combat Rising Interest Rates and Save Money
Rising interest rates may be on the horizon. Here's how to protect yourself from growing credit card interest.
Contributing Writer at Tally
February 23, 2022
The U.S. government can tweak the economy in many ways, including raising and lowering taxes, issuing stimulus checks, and offering tax rebates and incentives on certain products. However, one of its more effective economy-manipulating tools is the federal funds rate (fed funds rate).
During a crisis, like the coronavirus pandemic, the U.S. government can leverage the federal funds rate to help increase spending and support a sagging economy. However, this process sometimes causes surges in the other direction, leading to inflation.
This is precisely what happened following the COVID-19 pandemic, so the Federal Reserve policymakers plan to reverse course and raise the interest rate to knock down demand and cool spending.
Unfortunately, higher rates can impact consumer debt. With a federal funds rate hike, usually comes consumer debt interest increases, like loan rates and credit card APR. Here's how to combat rising interest rates to limit the impact on your wallet.
Federal funds rate defined
The federal funds rate is a target interest rate the Federal Open Market Committee (FOMC) sets as the rate at which commercial banks lend each other money overnight. This monetary policy trickles down to all other interest rates nationwide, including mortgages, loans, savings accounts, credit cards, bond funds, dividends, stock market prices, certificates of deposit and more.
Why the Federal Reserve increases interest rates
The Federal Reserve (the Fed) — the United States' central bank — uses the fed funds rate to help control the economy. When the economy is struggling, as we saw early in the COVID-19 pandemic, the Fed will reduce the fed funds rate in hopes the lower interest rate will increase consumer confidence and spur economic growth.
The Federal Reserve also uses this rate to help combat inflation. So, if the U.S. economy is booming and this drives consumer prices too high, the Fed can install interest rate changes — generally small increases in the federal funds rate. The Fed introduces this rising rate environment in hopes the higher interest rates will slow spending and cool inflation in the short term.
Your cheat sheet to combat rising interest rates
When interest rates start rising, you can combat them with a range of tactics. Here are some creative ways to fight back against rising interest rates.
Negotiate your credit card interest rate
Most credit cards have variable interest rates based on the prime rate and credit cards benchmark the prime rate to the federal reserve rate. So, after the Fed increases its rate, the prime rate follows suit, and you'll see your credit card interest rate hike up in a billing cycle or two.
You might be able to preemptively mitigate the interest rate rise by contacting your credit card company and negotiating your interest rate down before the hike occurs – here’s how.
The variable interest rate credit cards base their interest on is the prime rate plus a markup. The markup — also called the margin — is based on your credit score and credit history, and this is the number your credit card company will ultimately look to change if you call to negotiate.
So, if you're currently paying a 4% prime plus a 13.5% margin and negotiate a 0.25% rate reduction, your total interest rate will fall from 17.5% to 17.25%. Then, if the Fed releases a 0.25% interest rate hike, your prime rate will likely jump to 4.25%. However, since you already negotiated a 0.25% percentage-point decrease on the margin rate, you will end up at the same 17.5% you originally had.
If you can negotiate an even bigger interest rate cut, you could mitigate against additional future rate hikes too.
Balance transfer to low-interest-rate credit card
Credit card companies aggressively market to attract new customers or reactivate customers who've gone idle. They do so by offering low- or no-interest promotional rates for a specific period, such as 0% APR for 18 months.
If you receive one of these offers, you can transfer your variable-rate credit card balance to this 0% APR credit card to avoid all interest. Then, you can set up a payment plan to pay off or significantly pay down the balance before the promotional term ends.
If you cannot pay it off before the promotional term ends, you might receive a different promotional APR offer that you could roll the remaining balance onto and continue on your path of no or low-interest charges.
Keep in mind, these balance transfer cards often charge a 3% to 5% balance transfer fee. However, that fee could be much lower than you'd pay in interest charges over the same period. Overall it’s important to do the math and decide what works best for your personal financial goals.
Pay off your credit card statement balance by the due date
When you receive your credit card statement, there will be a period between the statement date or billing cycle end date and the due date. During this time, the credit card company will charge you no interest.
If you pay off the entire statement balance by the due date, the credit card company will not apply your interest charges from the previous billing cycle. This time frame is called the interest grace period.
Paying off your statement balance during the interest grace period makes all interest rate hikes a moot point for you.
Consolidate your variable-rate interest debt
You could also scrap the variable-interest-rate debt altogether with a debt consolidation loan. With a fixed-rate debt consolidation loan, you'll not only eliminate the possibility of current or future rate hikes impacting you but you may also get an interest rate that's lower than your current credit card rates.
On top of that, you can consolidate multiple credit card debts, meaning you'll make just one monthly payment towards the debt consolidation loan, instead of multiple credit card payments. This can help streamline your personal finances each month.
However, be careful when shopping for these personal loans. Many come with origination fees and other costs that can more than offset any interest savings. Also, beware of lenders offering variable-rate loans, as these will have interest rate increases similar to your credit card.
Protect yourself from rising interest rates
While rising interest rates may help with that 10-year treasury note or the real estate investment trusts you hold, these rising interest rates also increase borrowing costs, including credit cards.
Fortunately, you can mitigate the interest charges on these accounts with a handful of tricks, including interest rate negotiation, balance transfers, leveraging your interest grace period and debt consolidation. You can change your credit card interest permanently, temporarily or completely convert it to a fixed-rate loan by acting on these tips.
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†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.