Paying off credit card balances, emergency savings and other tips

With interest rates rising along with concerns about an economic slowdown, now is a great time to pay off credit card balances and bolster emergency savings, financial experts say.

The Federal Reserve raised its key interest rate by an aggressive three-quarters of a percentage point in June, and is expected to continue raising rates until it controls inflation. The Fed’s goal is to cool the economy without pushing it into a recession. That’s a difficult balancing act, so it makes sense to prepare yourself in case things go wrong.

A good first step is to pay off high-interest credit card debt. Credit card rates are closely linked to the Fed’s movements on interest rates and are generally variable. So they are likely to increase, meaning you’ll pay more interest if you carry balances on your cards.

“It’s absolutely the right time to focus on paying down those card balances,” said Greg McBride, chief financial analyst at Bankrate. The average credit card interest rate is about 16.8 percent, but it could rise to 18 percent by the end of the year, McBride said.

Credit card debt fell during the first year of the pandemic but soared as consumers depleted federal relief funds and grappled with 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 debt, have reported that their spending has increased significantly in recent months, said agency spokeswoman Madison Block.

“It’s harder to stick to a budget,” he said.

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

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

It can be challenging to pay off debt while also contributing to an emergency fund. 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 easy for people to save at a pace that works for them.

Now is also a good time to renew professional contacts and to sign up for training that can help broaden marketable skills, should you find yourself out of a job.

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

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

There are two common approaches. The first requires identifying the card with the highest interest rate and putting in extra money to pay off that balance first. (At the same time, make the minimum payments on your other cards.) When that card is paid off, apply the extra cash 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 minimum payments on the others. When the first card is paid off, move to the next lower 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 typically pay a fee of 3 to 5 percent of the balance you’re moving, so this technique only makes sense if you can pay off the balance during the interest-free period, which often lasts 18 months.

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

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

Aim for the most expensive items in your budget first rather than comparatively inexpensive frills like lattes, frugal folks suggest. If you rent, consider a roommate to share expenses, or negotiate with your landlord for a discounted rent in exchange for handling some maintenance work. Take inventory of your pantry before you shop for groceries and “use the freezer more,” said Sirianni. 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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