Interest rate ticks up. Time to tame your debt.

SALT LAKE CITY — The Federal Reserve bumped up its federal funds rate* Wednesday by a quarter of a point (0.25%) in an effort to cool inflation. The move marked the smallest interest rate hike since last March.

The Fed said more rate increases are likely.

Greg McBride, chief financial analyst at Bankrate, joins KSL NewsRadio’s Dave Noriega and Debbie Dujanovic to explain what you can do to lower your personal debt. 

Debbie said she was offered 10% off her purchase at T.J. Maxx if she signed up for the store credit card. 

“I said, ‘No thank you, I’m allergic to credit cards,” Debbie replied.

Later she found that the APR (annual percentage rate) on purchases was 30.74%.

“That is outrageous,” Dave said.

McBride said check your interest rate on your credit cards in a month or two because the rate hike Wednesday will increase it a quarter of a point.

“At this time a year ago, the average credit-card rate was a little over 16%. Well, now we’re knocking on the door at 20%,” he said, adding that the Fed increased the interest rate 4.5% in 2022.

0% (interest rate) balance transfer

Debbie said cardholders with 30% or greater APR need to move toward locking in a lower rate or a balance transfer.

“If you’ve got decent credit, you might be eligible for one of those 0% balance transfer offers that are out there right now,” McBride said.

He added most major credit card issuers have at least one offering a 0% balance transfer offer.

“Some of these last as long as 21 months, and so what that basically does is it shields you from further interest rate increases and gives you a 21-month runway with no interest where you can just hammer away at that debt.

“I can’t stress strongly enough, the urgency do that,” McBride said. “Credit card rates are at a record high. They’re not done rising. And here’s the thing, even when the Federal Reserve stops raising rates, those rates are not going to come down; they’re going to stay there.”

Don’t borrow against your future self

“What do you think about borrowing against your 401k to consolidate that debt because, again, I think the interest rate right now, you’ve got to pay back the loan with interest, but at least that interest is going back to yourself. I think it’s at about 8%. What do you think about that?” Dave asked.

” I don’t like it,” McBride shot back. “That’s like, that’s something I would not recommend.”

He added that the economy is slowing and employees are being laid off. 

“If you take down a loan and lose your job, you’re not going to be able to pay that back. And so all of a sudden, that loan is now treated as a distribution, which is taxable,” McBride said. “If you’re under age 59 1/2, you’re subject to a 10% early withdrawal penalty.”

Even if you are not laid off, and you borrow that money, in the meantime, you miss out on all the market gains on the amount you borrowed, he cautioned.

“Leave retirement for retirement; don’t borrow from your future self; focus on your present self,” McBride advised. “How did you get into that credit card debt? Is it because of a little bit of overspending? That’s the hole in the bucket you’ve got to plug.”

“He kind of took the wind out of the idea of — did he convince you?” Debbie asked.

“He wasn’t wishy-washy on it was he?” Dave replied. 

 

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  *The fed funds rate is the interest rate that depository institutions—banks, savings and loans, and credit unions—charge each other for overnight loans.

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