Carrying credit card debt is getting more financially wasteful for consumers as the Federal Reserve jacks up interest rates in a bid to tame soaring.
The Fed, making borrowing more expensive. Credit card issuers are now expected to raise their annual percentage rates (APRs) — the amount of interest card holders pay on their unpaid balances each month.
The average credit card interest rate is currently just shy of 17%, and is only expected to climb. If most card companies match the Fed's latest three-quarters point rate increase, the national average credit card APR could rise to well above 17%, according to a report from CreditCards.com. Those rates could soar further , as most analysts expect.
"Credit card debt is only going to get more and more expensive in the coming months," said Matt Schulz, a credit card analyst at LendingTree, an online loan marketplace. "When the Fed raises interest rates virtually everybody's credit card interest rates rise, so it's really important that you knock down your credit card debt now."
Americans are sitting on 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 carry $6,569 worth of credit card debt, according to LendingTree.
Here are five ways to chip away at your credit card balance.
Avoid purchases you can't afford
For starters, stop adding to your principal 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 you have, but that can stack up when you have to pay it off and interest rates are high compared to other kinds of debt," Corey Stone, senior adviser at the Financial Health Network and a former official at the Consumer Financial Protection Bureau.
If you can't afford a vacation this summer, then skip it, payments professionals advise.
Because credit card interest rates are higher than interest rates on mortgages, student loans and car loans, it's important to tackle outstanding credit card debt first.
"Maybe even forego contributing to a savings plans, particularly now when returns aren't high but interest rates are," Stone said.
Snowball v. 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 rate of interest you're paying on it.
The idea is to make minimum payments on all of your debt to avoid being dinged with late fees, but start by paying off the smallest, most manageable debt in full.
"You put money toward that one because it gives you a small win right away," said Nick Meyer, a certified financial planner who shares his personal finance knowledge on TikTok. "Then you move on to next one until all of your debt is paid off."
When using the avalanche method, which Meyer said is financially more prudent, you sort your debt by interest rate, ranking it from highest to lowest — then pay off the debt that is most expensive to carry.
Of course, this method can be more challenging psychologically because large higher-interest rate debt balances can take months to pay off, according to Meyer.
Ask your card issuer for a lower rate
It's always advisable simply to ask your credit issuer if they'll lower your interest rate. Most people assume there is no wiggle room with rates and fees, but that's often not true.
Also approach your lender with a repayment plan you know you can meet.
"Many lenders are open to coming up with a payment plan for you 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 without credit scores, like young adults and immigrants.
"If your lender doesn't agree with a payment plan or your APR is too high to begin with, you can find products where you can consolidate your debt in one place at a lower APR," Kim added.
Schulz at Lending Tree said that while few people ask their lenders to lower their interest rates, the majority of cardholders who do seek rate reductions 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 0% APR promotional rate.
"This can be a temporary solution, but longer term customers need to think about how to use a product that's by nature safer for them so they're mentally trained to manage their personal finance at a lower risk," Kim said.
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 keep paying down their debt while stopping it from growing.
"That can lead to tremendous savings of hundreds or even thousands of dollars, depending on how much you owe," said Ted Rossman, senior credit card analyst at BankRate.com.
Divide the total amount you owe by the number of months in the no-interest period, and stick to paying off a set amount each month. Note that you might be charged a 3% to 5% transfer fee up front, but Rossman said it "is still well 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 low-interest personal loan
Low-interest personal loans are another way to consolidate debt and pay it off in a less costly manner. Interest rates won't be zero, but could be as low as 6%, versus the roughly 17% APR most credit cards carry.
With a personal loan you can combine different kinds of debt, including credit card, medical bills and car payments into a single product, paying it off at a lower monthly rate. Loan terms are generally advantageous and can carry low interest rates that are fixed for up to five years, according to Rossman.
Of course, buckling down on spending and finding additional revenue streams can help you bring in more money than you spend and allow you to pay off your debt faster.
Getting a side hustle, selling unwanted belongings and cutting expenses can also help people gradually whittle down 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.
for more features.