Why 2014 is the year to get out of debt

When it comes to your personal finances, 2014 may be your best chance to take advantage of low interest rates and get out of debt — before it really starts costing you.

By Melanie Hicken  @melhicken

Since the 2008 financial crisis, the Fed has made monthly bond purchases in order to keep rates extraordinarily low and encourage consumer spending and borrowing. With the economy on the mend, the Fed is now slowly pulling back on those purchases, or tapering.

Long-term interest rates have already risen in anticipation of the Fed’s decision, so there likely won’t be a rapid spike in mortgage rates, which are already more than a percentage point higher than last year’s historic lows. Still, prospective borrowers could see mortgage rates reach more than 5% this year as the economy continues to strengthen, said Keith Gumbinger, vice president at mortgage information site HSH Associates.

But many other consumer loans should remain cheap since they are tied to short-term interest rates, which the Fed has committed to keeping near zero.

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The so-called prime rate, the rate at which banks lend to their best customers, has stayed at 3.25% since 2008 and isn’t expected to move higher in 2014. As a result, borrowers will continue to enjoy lower rates on student loans, car loans and credit cards, among other short-term loans.

But that won’t always be the case, and that makes now a good time to tackle those credit card bills, said Greg McBride, senior financial analyst at Bankrate.com.

“The message I would give to borrowers is 2014 could be your last hurrah,” he said. “The days are numbered. It makes sense to plan accordingly and really start to hammer away.”

Currently, credit cards are charging an average annual percentage rate of around 15%. While borrowers with poor credit can face higher double-digit rates, the most creditworthy consumers will continue to see APRs in the single digits, and will receive 0% introductory offers for as long as 18 months, said McBride.

Even the difference of a few percentage points can make a big difference.

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