Now that interest rates are rising with concerns about a slowdown in the economy, financial experts say it’s a good time to repay credit card balances and strengthen emergency savings.
The Federal Reserve is expected to raise key interest rates by three-quarters percentage points in June and continue to raise interest rates until inflation subsides. The Fed’s goal is to cool the economy without being forced into a recession. It’s a difficult balancing act, so it makes sense to be prepared in case things go wrong.
A good first step is to pay off your high interest credit card debt. Credit card interest rates are closely related to the Fed’s interest rate movements and usually fluctuate. Therefore, they can rise. This means that if you have a balance on your card, you will pay more interest.
Greg McBride, Chief Financial Analyst at Bankrate, said: The average interest rate on credit cards is around 16.8%, but could rise to 18% by the end of the year, McBride said.
Credit card debt declined in the first year of the pandemic, but swelled as consumers ran out of federal relief funds and overcame rising costs for gas, groceries and other necessities.Card balances in the first three months of the year were $ 71 billion higher From a year agoA “significant” increase, the Federal Reserve Bank of New York recently reported.
A customer of US Consumer Credit Counseling in Auburndale, Massachusetts, is a non-profit organization that helps people manage their debt and reports that their expenses have increased significantly in the last few months.
“It’s hard to keep a budget,” she said.
A slowdown in the economy may mean that some companies are starting to dismiss workers. Therefore, increasing savings should be prioritized to cover costs in the event of unemployment or reduced time. The idea is to save extra cash in an easily accessible account, even for a small amount.
“Emergency savings are an important component of overall financial security,” said Nick Maynard, senior vice president of Commonwealth, a nonprofit organization focused on helping economically vulnerable people. Says.
Repaying debt while contributing to rainy day funding can be difficult. Some employers offer programs to help workers build emergency savings, so check in at your benefits office. In addition, various mobile apps help automate deposits, making it easier for people to save at their own pace.
Now is also a good time to update your career contacts and sign up for training that may help you expand your marketable skills.
“This is the perfect time to network and polish your resume,” said Jen Smith, co-host with Jill Sirianni.Frugal friendsBudgeting podcast.
Here are some questions and answers about dealing with economic uncertainty:
What is the best way to reduce credit card debt?
There are two general approaches. Initially, you want to identify the card with the highest interest rate and put in extra money to pay the balance first. (At the same time, make the minimum payment with another card.) Once that card is paid, apply additional cash to the next higher rate card.
The second approach involves paying the card with the smallest balance first, for a sense of rapid progress, while making minimal payments to others. Once the first card is paid, move to the next lower balance.
If you have strong credit, consider applying for a card with a zero percent transfer offer. You can move your high interest balances to a new account and pay them off without incurring extra interest. However, since you usually pay a fee of 3-5% of the balance you are moving, this technique only makes sense if you can repay your balance during the interest-free period, which often lasts 18 months.
If you need more support, a nonprofit organization Credit counselor Provides a debt management plan for fees offset by lower rates negotiated with the card company.The Department of Justice provides a list of approved credit counseling agencies Website..
Need to reduce severance pay to fund emergency savings?
Michael A. Gillemett, an assistant professor at Texas Tech University’s Financial Planning School, said. If inflation is high, he said, “we have to save more” to make proper nest eggs. Contributing to a 401 (k) during a market downturn may be risky, but doing so means buying more stock and profiting when the stock recovers. Become. And they always have in the long run.
How can I reduce my expenses?
Frugal Friends suggests targeting the most expensive items on your budget first, rather than the relatively cheap frills like latte. If you pay the rent, ask your roommate to share the cost or negotiate with the landlord to ask for a rent discount in exchange for maintenance work. Before shopping for groceries, take the pantry in stock and “use more of the freezer,” Sirianni said. Stockpiling extra pieces and thawing them for a quick meal will help avoid the temptation of expensive takeaways after a long job.
