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Retirement Hacks

Oct. 3, 2022, 12:54 p.m. EDT

Interest rates are rising – how older Americans should handle their credit

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By Alessandra Malito

Rising interest rates may be nice for boosting savings accounts, but they’re unkind to credit card balances – older Americans, especially those on a fixed budget, should beware. 

Retirement Tip of the Week: Think carefully before making any charges to a credit card, and try to pay off any consumer debt as quickly as you can. 

About seven in 10 older Americans have some form of debt, according to a Senior Living survey of more than 1,000 adults in 2021. Of the participants aged 60 years and older, a quarter had an auto loan, 43% carried credit card debt, 13% were saddled with medical debt and 38% held a mortgage, the survey found. 

The number of older Americans with debt dropped from the first survey conducted the year before, during the height of the pandemic, when that figure was 79%. 

But then 2022 happened – and the Federal Reserve began steadily raising the federal-funds rate. Officials raised the rate to a range of 3% to 3.25% in September, and said it could go as high as 4.4% by year’s end. (The federal-funds rate impacts the interest rates consumers regularly use – they may see an uptick in the interest rate for their savings account, but they could also see a hike in the rate for any loans and debt.) 

See: What the Fed decision means for your wallet, your credit-card bill – and mortgage rates

Consumer debt is undesirable for any individual, but especially those on a fixed budget in retirement. Credit card debt in particular often comes with higher variable interest rates, so in an economic environment like the one we’re currently in, Americans may want to prioritize paying down those debts as quickly as possible.  

One way to do that is a simple analysis of the money coming in and out every month, cutting expenses wherever reasonably possible, and allocating a higher portion to credit card balances. Another is to look into a credit card with a promotional 0% interest rate – though with these, individuals must remain on a strict schedule and ensure they can pay the balance off before the promotion ends, such as after a year or 18 months depending on the terms. After that period ends, the interest rate spikes.

Consumers can also reach out to their credit card company, or a credit counselor, to learn more about debt repayment plans. 

Retirees should try to avoid tapping into their retirement nest eggs if possible, especially to avoid any tax consequences, said Dan Casey, an investment adviser and founder of Bridgeriver Advisors. And although refinancing may sound like a good idea, it might not make sense until rates have dropped. 

Want more actionable tips for your retirement savings journey? Read MarketWatch’s “Retirement Hacks” column

Gather all of the information you have on your debts, including the interest rates attached to each card or loan. There are two popular methods for paying down debt, Casey said – the avalanche strategy, where individuals put most of their repayment money toward the loans with the highest interest rates (after making minimum payments for all of their debts), and the snowball method, which is when people throw the extra cash toward the smallest debts. 

Not everyone can afford to pay off their debt quickly, but having a plan makes a big difference in eventually dwindling that balance down to $0. 

It’s important to remember that home loans are not viewed the same as credit card debt, though some Americans are more comfortable bringing a mortgage into retirement than others. Many mortgages are fixed, which means the interest rate and monthly payment remain the same through the life of the loan. A homeowner’s net worth is also growing when he pays his mortgage, since part of that payment is going toward the principal of the property. 

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