To reduce inflation, the Federal Reserve on Wednesday raised its key interest rate by 0.75 percentage points. One of the consequences of this move is that the interest on credit card debt will rise.
“Rising rates, high inflation and high balance sheets are a tricky combination,” said Ted Rossman, senior industry analyst at Bankrate.com and CreditCards.com. “We may soon see record high rates and credit card balances.”
Why is the Fed raising interest rates?
According to Matt Schultz, principal credit analyst at Lending Tree, the average annual percentage range for a new credit card offer is between 18.04 and 25.14 percent. “The worst news for cardholders when the Fed raises rates is that it doesn’t just raise rates on things you will buy in the future,” Schultz said. “The rate you pay on your current balances also increases, usually within one or two billing cycles.”
Even consumers with better credit scores can expect higher interest rates on their cards, Schultz said.
Maybe you’re holding your credit card debt like a rock, pecking at it little by little with minimal payments, or throwing extra money into your balance from time to time. Or perhaps your financial circumstances have forced you to rely on credit to make ends meet. Whatever your situation, here are seven ways to reduce your credit card debt in light of this latest Fed rate hike and more hikes likely to come.
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1. Stop charging your credit cards. Have you ever heard the expression “If you’re in a hole, stop digging?” You should stop using your credit cards if you don’t pay off the balance every month. Also consider that whatever you borrow, whether it’s TV, dinner, vacation, or clothes, will end up costing you more money in the long run if you keep paying back.
I think the most important aspect of the latest boost is the cumulative effect. I think the Fed is doing the right thing in fighting inflation, but as Chairman Jerome H. Powell said, there is some pain associated with it. Credit card debt is a good example.
According to the American Bankers Association, the share of credit card revolvers, or those carrying a monthly balance, was 40.9% nationally in the first quarter of 2022.
“What’s really important is that all of these rate hikes added up could result in a few percentage points higher credit card rates in one year,” Schultz said. “Many people’s financial margin for error is negligible anyway. With rising grocery bills and rising gas prices, the last thing they need is a credit card interest rate hike.”
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2. Start paying the smallest balance. A question I often get when it comes to credit card debt is: Should I pay off my highest interest rate credit cards first, or start with the one with the lowest balance?
On paper, the logical method would be to look for the debt with the highest interest rate. But what works on paper doesn’t always work in practice. The debt reduction method I recommend is called the debt spurt method. In doing so, as in the 100-meter run, the goal is to make a super-fast run on duty.
In my experience, helping hundreds of people pay off their credit card debt increases their motivation to get out of debt when they score a quick win. As a result, they become more aggressive in attacking what’s left of the debt, ending up paying less interest payments than if they started with the card with the highest interest rate. Part of the battle to reduce debt is sticking to the plan.
With the debt dash, you list all your debts, starting with the one with the lowest balance. Then use any extra money you can find to apply it to that first card on your list, making the minimum payments on all other debts. Once you discard that card, move on to the next one on your list, and so on. If two cards have the same balance, then priority is given to the one with the higher interest rate.
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3. Transfer balances to a card with zero interest. If you have good credit, you may qualify for an offer that allows you to transfer your balances to a zero interest card for a limited time.
According to Schultz, the longest zero-interest card offer is 21 months. The vast majority of offers are for 12 or 15 months.
According to Schultz, there are still many proposals for zero-interest balance transfers. But you may have to pay more to transfer your balance to a zero interest card.
“We are also seeing a slight increase in the number of cards charging 4 or 5 percent for balance fees instead of the 3 percent that is still the most common,” Schultz said.
Typically, these cards are available to people with a credit score of 670 or higher, according to Rossman. “The average FICO score is 716, so most people should qualify,” he said.
Balance Transfer Credit Cards May Be Beneficial For Some People
4. Talk to your credit card issuer. Talking is expensive when it comes to credit card debt. Many borrowers struggle under the weight of their According to Bruce McClary, senior vice president of communications for the National Credit Counseling Foundation, never ask for help.
Before calling your lender, check your credit report and credit score, according to McClary. This helps to know how strong your negotiating position is. “You want to make sure you know exactly what you’re going to say to the lender to start the conversation about finding more affordable options,” he said. “Use a high credit score to your advantage.”
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Perhaps when you first got the card, your credit history was not very good, so you were offered a card with a high rate. But with timely payments, you can now qualify for more affordable terms or even an introductory credit card interest-free rate, McClary said.
“That’s a huge win because then you can start planning for a power payoff of the balance while you have that interest-free repayment period,” he said. “But those offers go to people with better credit scores.”
5. Use debt consolidation or a personal loan. It makes sense to try to consolidate debt and make one payment, especially if you can lower your interest rate. But don’t just focus on the monthly payment, McClary warns. “What you don’t want to do is fiddle around with conditions so that you have this artificially low pay,” he said.
Revenge of savers: Fed rate hike benefits the cautious
You may get a lower monthly payment, but you can pull the loan for years and end up paying more interest over time than your issuer charged.
6. Contact a non-profit consumer credit advisor. If you are uncomfortable negotiating with your card issuer, seek help from a non-profit credit counseling agency by visiting the National Credit Counseling Foundation or by calling 800-388-2227.
Working with a credit counselor, you can create a debt management plan. You make a one-time payment each month to a non-profit agency, which then forwards the payments to your creditors. By participating in this type of debt management program, you may benefit from reduced or eliminated financial fees or commissions.
Let grown children fend for themselves? This is outdated in today’s economy.
7. Consider bankruptcy as a last resort. I’ve helped several seniors who were file-burdened with credit card debt to protect themselves from bankruptcy. For them, credit has become a bridge to extend Social Security retirement checks. So they made their meager ends meet. Bankruptcy gave them a fresh start.
Ask for recommendations for a bankruptcy attorney or use the Find An Attorney database for the National Consumer Bankruptcy Bar Association.
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