Interest rates have been rising rapidly, increasing by about 2.25 percentage points since the Federal Reserve started tightening monetary policy in March 2022. This increase affects everything from mortgages to secured loans to credit cards, and total household debt balances have gone up substantially. To minimize the effect of higher financing costs, we encourage our clients to focus on debt within their control.
Look over your household budgets to identify areas of possible cost-cutting:
- Cable and streaming services
- Phone plans
- Dining choices
Minimize the use of additional debt.
- Increase mindfulness of spending and reduce the risk of impulse buying by planning purchases in advance of the holiday gift giving.
- Use accumulated credit card rewards to pay statement balances.
Explore options for lower-cost financing.
- Transfer credit card balances to zero- or promotional-rate cards.
- Seek out low- or zero-interest rate borrowing options for large purchases like appliances or vehicles.
- Research borrowing sources that might offer lower interest rates than credit cards – bank loans, home equity credit lines, secured lines of credit using an investment portfolio, or intra-family lending.
Consider these lower-cost financing options.
Zero-percent Interest Credit Cards
When making a rare large purchase and/or needing to pay off a large balance, a zero-percent interest card will allow some time and flexibility. They may even provide an opportunity to make money on the transaction by investing the principal amount.
You need to be confident that you can pay off the balance in the next one to two years.
When considering increasingly available zero-percent financing products, do your research and consider if the offer fits your criteria:
- Length of time
- If it covers credit card purchases, balance transfers, or both
- Fee structure for balance transfers and any penalties
Be aware of the risks and requirements of zero- or low-interest rate financing:
- To qualify, you need a good or excellent credit score.
- Terms are typically limited to 12 to 21 months.
- The interest rate on a remaining balance at the end of the offer period could be significantly higher than on a traditional credit card.
- There may be high fees for balance transfers, foreign transactions, and cash advances.
- There may be penalties for missed or insufficient payments.
- Rewards programs are usually limited or unavailable.
- Your credit score may be negatively impacted by adding a credit card.
Buy Now, Pay Later
Buy Now, Pay Later (BNPL) loans have become a new alternative to the layaway plans of old. They are available for in-store as well as online purchases, but unlike layaway, the buyer obtains the product right away.
The heavy marketing, widespread availability of apps, quick credit approval, and offer of instant gratification have recently expanded the use of BNPL loans. Even people with no credit history, low credit scores, and/or no bank accounts are being approved.
In part, because of their ease of use, BNPL loans are fraught with problems, such as:
- Overspending and overborrowing
- Tracking and repaying multiple BNPL loans on different schedules, possibly leading to bank overdraft fees
- High fees for late or failed payments
- Convenience and/or service fees
- No help in building a credit history
- Lenders’ extensive data mining targets vulnerable people, contributing to the addictive use of BNPL loans
- Fewer protections for product returns, dispute resolution, etc., and limited access to customer service
Though BNPL loans may offer a means to make a necessary purchase, we advise being aware of potential problems and carefully considering your debt limit.
Share this article with someone you know who is challenged with financing debt and/or at risk for job loss.