How To Pay Off Debts Up To Six Interest Rate Increases

Now is the time to pay off the high-interest debt before it goes up in price.

Adjustable rate debt, such as credit card balances or auto loans, is about to rise in price because the Federal Reserve raised interest rates this week. The Fed also said several more hikes are expected this year, with six more expected.

A Fed rate hike doesn’t immediately increase the interest you pay on loans, but affects them indirectly. Financial advisers say you should pay off your high-interest debt as quickly as possible, given the Fed’s stance. It will cost you if you don’t.

Here are some tips on how to deal with it.

Create a sense of urgency

You can use the prospect of an additional interest rate hike to create a sense of urgency to pay off your debt. Carol Ward, a New York-based psychotherapist and self-confidence coach, suggests visualizing what it’s like to pay more and more interest. Then imagine the relief of paying off your debt faster.

“You will quickly realize, either by feeling energized or frustrated, which solution is best for you,” she said.

Paying off your debt faster means you may have to cut back on some extra expenses in your life. While this may not seem like a great deal in the short term, Ms. Ward suggests focusing on the possible pleasure you’ll feel when you get rid of that debt.

“Connect to pride in the efforts and steps you are taking to get rid of this debt,” Ms Ward said.

Get motivated

Rethink paying interest on your debts as income that can induce you to pay off the highest-interest debt first, said Michael Liersch, head of counseling and planning at Wells Fargo. Calculate how much money you’ll get back over the life of the debt, he said.

A quarter percentage point increase by the Fed won’t make much difference to most credit card borrowers, said Ted Rossman, senior industry analyst at Bankrate. That would add only about $1 a month to the minimum payments against an average credit card debt of about $5,500 at an average credit card rate of about 16.34%, he said.

However, if you only make the minimum payments, you will end up paying over $6,000 in interest and it will take you over 16 years to pay off the debt. The amount you owe and the time it takes to pay it off will increase as the Fed raises rates.

Know your debts

“Once you have a schedule, list each of your debts along with the corresponding interest rate,” said Manu Lakkur, director of product at Credit Karma. Creating a spreadsheet or keeping track of what you owe in an app can help you be more in control, he says.

Pay particular attention to credit card debt, adjustable-rate mortgages, home equity lines of credit, auto loans, and private student loans, as interest rates on these loans can rise faster than other types of loans.

The Federal Reserve’s primary tool for managing the economy is changing the federal funds rate, which can affect not only the cost of borrowing for consumers, but broader decisions of companies, such as how many people to hire. The WSJ explains how the Fed manipulates this single rate to drive the entire economy. Illustration: Jacob Reynolds

To make a plan

Financial planners usually recommend paying off expensive debt first before dealing with balance problems at lower rates.

The interest on your debt can increase faster than the growth you can expect from your investments over the same time period, said Kyle McBrien, financial planner at digital investment consultant Betterment.

Treat minimum debt payments as fixed costs, Mr. McBrien said. Then, be persistent in paying off the loan with the highest interest rate first, and then moving on to the next one to minimize the total amount of interest paid over time.

Consider a scorched-earth strategy, spending as little as possible and selling any assets you don’t need right now, like collectibles, to help you pay off debt faster, said Benjamin Rickey, a financial planner in Yakima, Washington. .

SHARE YOUR THOUGHTS

What strategies have you used to keep high-interest debt low? Join the discussion below.

“It will be painful,” Mr. Rickey said.

Refinance your debt

If you have variable rate loans, consider refinancing to lock in a fixed rate. This will give you a reliable monthly payment that won’t go up if interest rates keep going up.

The decision to refinance largely depends on your financial situation and your goal, said Credit Karma’s Mr. Laccourt: save money over the life of your loan, or be able to lower your monthly payments to free up more money.

If you have a large amount of expensive credit card debt or juggling multiple credit card payments, consider consolidating with a personal loan, which usually comes at lower interest rates, especially if you have good credit.

Sign up for a credit card with a 0% balance transfer, Mr. Rossman said at Bankrate. You can avoid interest for up to 21 months, he says, and save hundreds of percent on interest payments depending on how much you owe. Most offers charge a transfer fee of 3% to 5%, but it can be worth the cost if you are disciplined about making money back during the 0% offer period, Mr. Rossman said.

Email Veronica Dagher at [email protected]