Paying off credit card balances, emergency savings and other tips

With interest rates rising and worries about an economic downturn, now is the time to pay off credit card balances and boost emergency savings, financial experts say.

The Federal Reserve raised its key interest rate by three-quarters of a percentage point in June, and it is expected to continue raising rates until it gets inflation under control. The Fed’s goal is to cool the economy without pushing it into recession. It’s a tough balancing act, so it makes sense to be prepared in case things go wrong.

A good first step is to pay off high interest credit card debt. Credit card rates are closely tied to Fed interest rate movements and are generally fluctuating. They are therefore likely to increase, which means that you will pay more interest if you carry balances on your cards.

“Now is absolutely a good time to focus on paying off those card balances,” said Greg McBride, chief financial analyst at Bankrate. The average credit card interest rate is around 16.8% but could climb to 18% by the end of the year, Mr McBride said.

Credit card debt plummeted in the first year of the pandemic, but soared as consumers depleted federal relief funds and faced rising costs for gas, groceries and other essentials. Card balances in the first three months of this year were $71 billion higher than a year earlier, a “substantial” increase, the Federal Reserve Bank of New York recently reported.

Clients of American Consumer Credit Counseling in Auburndale, Mass., a nonprofit agency that helps people manage their debts, have reported that their spending has increased significantly in recent months, the spokeswoman said. the agency, Madison Block.

“It’s harder to stick to a budget,” she says.

A downturn in the economy may mean that some companies will start laying off workers. Thus, increasing savings to be able to cover expenses in the event of job loss or reduced hours should be a priority. The idea is to set aside any extra money – even a modest amount – in an easily accessible account.

“Emergency savings are a key part of overall financial security,” said Nick Maynard, senior vice president of Commonwealth, a nonprofit focused on helping financially vulnerable people.

Paying off debt while contributing to a rainy day fund can be difficult. Some employers offer programs to help workers build emergency savings, so check with your benefits office. And a variety of mobile apps help automate deposits, making it easier for people to save at a pace that suits them.

It’s also a good time to renew your professional contacts and sign up for training that could help you develop marketable skills, if you find yourself unemployed.

“It’s a great time to network and polish that resume,” said Jen Smith, co-host, with Jill Sirianni, of the “Frugal Friends” budgeting podcast.

Here are some questions and answers on how to deal with economic uncertainty:

There are two common approaches. The first calls for identifying the card with the highest interest rate and investing extra money to pay off that balance first. (At the same time, make minimum payments on your other cards.) When that card pays off, apply the extra money to the card with the next highest rate, and so on.

The second approach is to pay off the card with the smallest balance first, for a sense of rapid progress, while making minimal payments on others. When the first card is paid, proceed to the next lowest balance.

If you have strong credit, consider applying for a card with a zero percent transfer offer. You can move high interest balances to the new account and pay them off without incurring additional interest. However, you’ll usually pay a fee of 3-5% of the balance you’re transferring, so this technique only makes sense if you can pay off the balance within the interest-free period, which is often 18 months.

If you need more help, nonprofit credit counselors offer debt management plans for a fee, which are offset by lower rates negotiated with card companies. The Department of Justice offers a list of approved credit counseling agencies on its website.

Try not to, said Michael A. Guillemette, assistant professor in the School of Financial Planning at Texas Tech University. When inflation is high, “you have to save more” to build up an adequate nest egg, he said. Contributing to your 401(k) during a market downturn may seem risky, but it means you’ll buy more stocks — and benefit when stocks rebound. And they always have, in the long run.

Target the most expensive items in your budget first rather than relatively inexpensive frills like lattes, the Frugal Friends suggest. If you are renting, consider a roommate to share the expenses or negotiate with your landlord a reduced rent in exchange for some maintenance work. Stock up on your pantry before you shop and “use the freezer more,” Ms Sirianni said. Storing extra servings and defrosting them for a quick meal can help you avoid the temptation of expensive takeout after a long day at work.

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