When you originally sign up for a credit card, you’re given an interest rate. These rates vary between borrowers and lenders and are heavily dependent on the borrower’s credit history. In some cases, these interest rates are high, but most borrowers work hard to keep down their balances and make payments on time.
Unfortunately, there are several things that can impact the borrower’s ability to keep up with their payments, including job loss and unexpected expenses. The team at Symple Lending has shared yet another obstacle: rising fed interest rates, which increases credit card interest rates.
Process of Paying Down Credit Cards and How Rising Interest Rates Affect It
Credit cards provide a convenience. They allow you to make a purchase or pay a bill with money you don’t yet have. Each month, you receive a bill that includes the principal – or the amount borrowed – and interest – or the percentage charged for borrowing it.
You are also given a minimum payment amount that allows you to pay a portion. Paying just the minimum payment doesn’t typically bring down your balance much or at all, but it gives you another month to pay down the balance. Most borrowers aim to pay more than the minimum payment to chip away at the principal.
Unfortunately, rising interest rates mean that even less of the payment amount is going to the principal. As interest is compounded monthly, it means that the balance is constantly growing.
As a simple example, imagine that you have a credit card with a $300 limit and a 10% interest rate. If you use the full credit line each month, you’ll owe $30 in interest. Your minimum payment is $25, but you make a payment of $50. This leaves $20 on your credit line, which means you will still be charged for interest on $280 the next month.
If that interest rate rises just 5%, you’ll owe $45 in interest each month. Paying $50 per month will leave you with a balance of $295, which interest will be added to the next month. Your balance will be well beyond your credit limit and continually growing each month.
How Can Borrowers Get Out of Debt?
With compounded interest constantly increasing your balance and making your monthly payment seem useless, paying down your credit card debt can seem impossible. This is even more troubling if you’ve put off saving to try to pay down your debt.
One effective method is debt consolidation. This involves getting one loan to pay off your other debt. The new loan typically has either a lower or – at minimum – a fixed interest rate. It also spreads your payments out over a longer term, without adding compounded interest each month. This means that every payment you make is going toward getting out of debt, not keeping you caught up in an endless cycle.
If you feel like you are drowning in debt, you are not without options. Working with people such as the skilled professionals from Symple Lending can help you carve a path through your debt and grow your savings.
