Ten Steps to Reduce Debt Before Interest Rates Rise (Again): Part 1

By Barbara O’Neill, Ph.D., CFP®, boneill@njaes.rutgers.edu

Computer, paper, and pencils on a white table.
Photo by Nataliya Vaitkevich on Pexels

In March 2022, the Federal Reserve approved a 0.25% interest rate hike, its first increase since December 2018. More interest rate hikes are likely during the Fed’s remaining 2022 meetings in an effort to aggressively reduce inflation.

Understandably, military families with existing variable rate debt are concerned. They are “sitting ducks” for coming higher interest rates. Ditto for those about buy to a house, car, or other high-cost item that involves applying for credit.

What to do? Below are the first five of 10 debt-reduction strategies that Personal Financial Managers can suggest to clients to try to reduce borrowing costs and mitigate the effect of higher debt payments resulting from higher interest rates:

  • Make Debt Repayment Urgent. The name of the game is “beat the Fed.” In other words, pay off consumer debts as soon as possible. Start by making a list of creditors, the amount owed, and the monthly payment for each debt. To free up money for debt repayment, plan a once a month “nothing week” where family members agree not to spend any more money than is absolutely necessary. Celebrate the resulting savings with a small reward.
  • Pick a Payoff Method. Increase monthly consumer debt payments beyond current payment levels. Some people add more to their highest-interest debt (avalanche method) while others start with debts with the smallest balance (snowball method). Both types of calculations can be done using the Utah State University Extension PowerPay
  • Consider a Balance Transfer. This strategy only works if interest savings is greater than the balance transfer fee, typically 3% to 5% of the amount transferred (e.g., $150 to $250 on a $5,000 balance). To make the math work, find a very low (e.g., 0% to 1.9%) “teaser” rate that lasts for 12 to 18 months and pay off the balance before the rate expires.
  • Negotiate a Discount. It never hurts to ask existing creditors for an interest rate reduction. They will often acquiesce to retain good customers who pay bills on time. Don’t phrase the request as a yes-no question (e.g., ‘Will you lower the interest rate on my credit card?”). Rather, suggest an interest rate several points below what would be acceptable.
  • Avoid New Debt. It is best to avoid incurring any new debt while existing debt is being repaid in a rapid-fire manner. New debt will only slow down debt repayment progress. Some people give their credit cards to a trusted party to hold for them, place them in a safe deposit box or locked file cabinet, or, literally, put them “on ice” by freezing them to prevent impulse spending.

Next week’s blog post will cover the last five steps to reduce debt before interest rates rise (again).

United States Department of Defense logo, a partner of OneOp
United States Department of Agriculture logo, a partner of OneOp