The tear that the U.S. economy has been on has motivated the Federal Reserve Bank to raise its benchmark target federal funds several times since 2015.
This has inevitably affected the interest rates consumers pay, including the rates they pay on their credit cards. For many, the rising interest rate environment has raised concerns about whether now is the time to do balance transfers to keep their finance costs down.
Here, we’ll go over the pros and cons of credit card balance transfers in this rising interest rate environment.
Federal Reserve goes to work
The Federal Reserve, which is commonly referred to as the Fed, defines the federal funds rate as “the interest rate at which depository institutions lend reserve balances to other depository institutions overnight--around the target established by the Federal Open Market Committee.”
Since 2015, the Federal Reserve has hiked the benchmark rate eight times. This year, it’s already raised rates three times, with the last being at the end of September.
It’s done so in quarter of a percent increments. In September, it raised the target range for the federal funds rate to 2% to 2.25%.
The Fed typically raises rates when the economy is showing signs of strengthening.
Keep in mind that credit cards typically have variable rates that are linked to the Fed’s prime rate. Creditcards.com noted that the index reflects the prime lending rates posted by seven of the 10 largest banks in the U.S. When the Fed raises rates, the cardholder’s rate typically coincides with the amount of the Fed’s rate hike.
There is widespread speculation that the Fed will raise rates again in December, however there are some rumblings about that not happening. Even if it doesn’t, many believe that three hikes are on tap for 2019, and then at least one more in 2020.
The immediate effects of the Fed raising rates relate to the monthly minimum payments, and, of course, interest rate charges. Industry players note that the minimum payments will likely go up if the cardholder carries a balance.
The quarter of a point hikes have resulted in cardholders having to pay an additional $2.50 a year in interest for every $1,000 they carry on their cards. For example, a cardholder carrying a $5,000 balance will see their interest rate costs go up $12.50 a year.
Balance transfers to the rescue
To position themselves for these hikes, credit card industry observers agree that credit cardholders should be proactive in being able to keep their costs as low as possible.
One solution relates to balance transfers.
All the jazz about interest rates continuing to move higher has industry players advising cardholders to consider transferring their balances from high interest rate credit cards, to cards that have lower rates. This is especially useful for those who carry large balances as well.
Ted Rossman, an Industry Analyst for CreditCards.com, had this to say to BalanceTransferCalculator.com about rising rates.
“Rising rates make it an even better time to apply for a balance transfer credit card! At CreditCards.com, our weekly rate report shows a national average of 17.01%, and that’s likely headed higher courtesy of the Federal Reserve. With the average household credit card debt at $5,700 according to the Fed, that’s nearly $1,000 in interest over just one year.”
The tricks of balance transfers
Financial Debt Resolution Attorney Leslie Tayne pointed out what so many consumers contend with when it comes to debt. To BalanceTransferCalculator.com, she said the following.
“Balance transfers, if done carefully, can be a successful way to eliminate high-interest rate credit card debt. Overwhelming credit card debt can disgruntle consumers which may lead to people choosing options that can appeal to them at first; however, if they don’t thoroughly research this can only end up hurting them in the long haul. Moving your credit card debt from a high-interest rate to a lower one can be appealing and effective for some but is not necessarily for everyone.”
One trick relates to being committed to paying off the balance on the new card sooner rather than later. Cardholders should also keep in mind that when the card issuer takes away the interest rate promotion, they could be hit with a higher interest rate than a normal credit card, along with a late fee.
The strengthening economy has served as a double-edged sword. On one hand, savers are enjoying heftier returns on their investments. On the other hand, borrowers, such as credit cardholders, are seeing higher finance charges.
As has been explained in this article, credit cardholders should consider balance transfers to keep their finance costs as low as possible.
Do your homework, and check out the tools offered by BalanceTransferCalculator.com to maximize the benefits of your efforts!