Strategies for Getting Your Debt Under Control
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Here's your money briefing for Wednesday, March 23rd. I'm J.R. Whelan for The Wall Street Journal. Last week, we told you how it's going to be more expensive for American households to hold debt as the Federal Reserve starts raising short-term interest rates. With rate hikes underway, paying off your high interest debt now can ease the burden on your finances.
that interest rate is most likely going to skyrocket. So you want to use that opportunity to become as debt-free as possible as soon as possible.
On today's show, we'll talk with our personal finance reporter, Veronica Dagger, about ways of paying off your high-interest debt. That's after the break.
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After hovering near zero for the past few years, interest rates are expected to rise throughout 2022 and possibly into next year.
How will rising interest rates affect household borrowing costs?
That means it's going to get even more expensive to borrow money and carry credit card balances. So what strategies can you use to pay down high interest debt and avoid the financial hit of higher rates? WSJ personal finance reporter Veronica Dagger has been looking into it and she joins me now. Hey, Veronica, thanks very much for being here.
Thanks for having me.
So Veronica, a lot of people hold several different kinds of debt, and it can be kind of intimidating as they make several monthly payments. But what did experts tell you about how to even begin getting a handle on your debt?
Yeah, you got to know your debts, right? Because it can feel overwhelming if you don't know what you owe and how much you owe and who you owe it to. So you make a spreadsheet, use an app and just list everything you owe so you can feel more in control. You want to pay special attention to the credit card debt, any adjustable rate mortgages, auto loans, private student loans, because as interest rates on these loans may rise faster than other types of loans that have a fixed rate.
Now, last week, the Fed said it was raising short-term interest rates by a quarter percentage point. That might not have a big effect on credit card borrowers now, but what should they look out for going forward?
Well, off the top, it's not a huge deal, right? If you have basically that average credit card debt in the U.S. is about $5,500. Average credit card rate is about 16.34%. With that, you're only going to add about a dollar a month to your minimum payment. So no sweat at first, right? But the thing is, if you only make minimum payments on that debt, you're still going to be paying more than $6,000 worth of interest, and it's going to take you more than 16 years to pay off that debt.
16 years?
16 years. I mean, it's staggering. And that amount you owe and the time it's going to take to repay it is only going to increase as the Fed raises rates. As you know, the Fed is expected to raise at least six more times. All of that is going to add up for borrowers.
Let's talk about possible strategies people can use to save some money on their debt in this environment.
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