Credit card debt is getting more expensive for consumers as the Federal Reserve raises interest rates in an effort to stem the surge.
The Fed, making borrowing more expensive. Credit card issuers are now expected to increase their annual percentage rates (APR) – the amount of interest cardholders pay on their outstanding balances each month.
The average credit card interest rate is currently just under 17% and is only expected to rise. If most card companies match the Fed’s latest three-quarter point rate hike, the national average APR for credit cards could jump well above 17%, according to a report from CreditCards.com. These rates could rise further as most analysts expect.
“Credit card debt is only going to get more and more expensive in the months ahead,” said Matt Schulz, credit card analyst at LendingTree, an online lending marketplace. “When the Fed raises interest rates, virtually everyone’s credit card interest rates go up, so it’s really important that you reduce your credit card debt now.”
Americans are sitting in a lot of credit card debt. While card balances in the first quarter of 2022 declined in line with seasonal trends, at $841 billion, they are still $71 billion higher than they were in the same period last year, according to the New York Federal Reserve. On average, cardholders have credit card debt of $6,569, according to LendingTree.
Here are five ways to reduce your credit card balance.
Avoid purchases you can’t afford
For starters, stop increasing your equity by putting purchases you can’t afford on a credit card.
“Sometimes it’s tempting to use a credit card to cover a gap in expenses and income, but that can add up when you have to pay it back and the interest rates are high compared to other types. debt,” said Corey Stone, senior adviser. at the Financial Health Network and a former official of the Consumer Financial Protection Bureau.
If you can’t afford a vacation this summer, skip it, payments professionals advise.
Since interest rates on credit cards are higher than interest rates on mortgages, student loans, and auto loans, it’s important to tackle unpaid debts on credit cards first. credit card.
“Maybe even give up contributing to a savings plan, especially now that returns aren’t high but interest rates are,” Stone said.
snowball versus avalanche
Two popular approaches to paying off overdue credit card balances include the so-called snowball and avalanche methods. Taking the snowball approach means organizing all of your debt by amount — not by the interest rate you’re paying on it.
The idea is to make minimum payments on all of your debt to avoid being penalized with late fees, but first pay off the smallest, most manageable debt in full.
“You put money in that one because it gives you a little payout right away,” said Nick Meyer, a certified financial planner who shares his personal finance knowledge on TikTok. “Then you move on to the next one until all your debt is paid off.”
When you use the avalanche method, which Meyer says is more financially prudent, you sort your debt by interest rate, ranking it from highest to lowest, then pay off the most expensive debt to carry.
Of course, this method can be more difficult psychologically, as large balances of higher-interest debt can take months to be paid off, according to Meyer.
Ask your card issuer for a lower rate
It is always advisable to simply ask your credit issuer if they will lower your interest rate. Most people assume there’s no wiggle room with rates and fees, but that’s often not true.
Also approach your lender with a repayment plan that you know you can stick to.
“Many lenders are willing to offer you a payment plan that customers don’t know about. Be proactive and ask for a certain payment plan,” said Kristy Kim, co-founder and CEO of TomoCredit, a new credit card company. for people with no credit score, such as young adults and immigrants.
“If your lender doesn’t agree to a payment plan or your APR is too high to start with, you can find products where you can consolidate your debt in one place at a lower APR,” Kim added. .
Lending Tree’s Schulz said that while few people ask their lenders to lower their interest rates, the majority of cardholders who ask for rate cuts are successful.
Transfer your balance to a 0% APR card
Consumers can consolidate their credit card debt and move it to a new card that offers customers a promotional 0% APR rate.
“It may be a temporary fix, but longer-term customers need to think about how to use a product that is inherently safer for them so they are mentally trained to manage their personal finances with less risk,” said Kim.
For example, the Wells Fargo Reflect credit card offers new customers an introductory APR of 0% for up to 21 months. This in effect allows people to continue to pay down their debt while preventing it from growing.
“This can lead to huge savings of hundreds or even thousands of dollars, depending on how much you owe,” said Ted Rossman, principal credit card analyst at BankRate.com.
Divide the total amount you owe by the number of months in the interest-free period and stick to a fixed amount each month. Note that you may be charged a 3% to 5% transfer fee upfront, but Rossman said “it’s still worth it.”
“If you do it right and don’t put new purchases on the card, it’s a great way to save money. The new loan essentially pays off the old loan at a much lower rate,” he added.
Take out a personal loan at a reduced rate
Low-interest personal loans are another way to consolidate debt and pay it off at a lower cost. Interest rates won’t be zero, but could be as low as 6%, compared to around 17% for most credit cards.
With a personal loan, you can combine different types of debt, including credit cards, medical bills, and car payments into one product, paying it off at a lower monthly rate. Loan terms are generally favorable and can carry low interest rates that are fixed for up to five years, according to Rossman.
Of course, cutting back on your expenses and finding additional sources of income can help you earn more money than you spend and allow you to pay off your debt faster.
Getting a scramble, selling unwanted goods, and cutting expenses can also help people gradually reduce their debt to a manageable level.
“The fundamentals of earning more and spending less can be applied in tandem with some of these other strategies,” Rossman said.