In response to staggering inflation, the Fed raised interest rates for the third time this year, making borrowing money more expensive.
Why it matters
If you have credit card debt, your monthly payments could rise sharply this year as annual interest rates, or APRs, continue to rise.
What does that mean for you
Creating a plan to repay your credit card balance can now save you money in interest costs.
In response toThe Federal Reserve – the US Federal Reserve, which is in charge of monetary policy – has launched several from March. This has a ripple effect through almost every part of the economy, including financial tools such as credit cards. As it becomes more expensive for banks to lend money to each other, it later becomes more expensive for banks to lend to consumers. This leads to an increase in APR credit cards or interest rates. Unfortunately, this can mean that you personally incur higher costs.
If you carry your credit card balance after your due date, it will be subjectdetermined by your specific credit card and . For people who carry a balance from month to month, their interest rates will continue to be more expensive with each rate increase. And you usually won’t get notified if your interest rates go up.
Here’s how this rate increase will affect your credit card statements, with examples, along with some steps you can take to repay your amount and.
Why credit card debt is getting more expensive
By increasing the rate of federal funds – overnight interest rates between banks – the domino effect causes an increase in APR credit cards. Although the rate of federal funds only directly dictates lending between banks, it affects the costs of banks, which in turn are passed on to consumers.
The base rate, which is the basis for all borrowing rates for bank clients, is derived from the federal fund rate. Premiums are attached to it depending on the creditworthiness of the candidate and institutional factors. This gives effective interest rates, such as annual credit card interest rates.
But when should you expect credit card rates to rise? Credit card APRs adjust almost immediately, usually within a billing cycle or two. You’ve probably already been subject to new APRs from previous rate increases without even realizing it.
If you pay your credit card bill in full each month, you have nothing to worry about. But if you have a balance on that card, carrying it from month to month will cost you more as rates increase.
Here is an example. Let’s say you have a credit card balance of $ 5,525, which is the national average according to the Experian credit bureau. Meanwhile, theamounts to approximately 20%. If you make only the minimum payment (assuming the minimum payment is the standard 2%), repaying your card balance would take you just over 58 years and would cost you more than $ 24,750 in interest.
However, if interest rates on credit cards were to increase by one percentage point, the repayment of the same balance would take more than 76 years and would cost more than $ 34,400 in interest. Do your math using the Bankrate sister page of CNET’s Bankrate minimum credit card calculator.
So what do you need to do now? Here are six steps you can take to pay your credit card balance and save money.
1. Repay, or at least reduce, any existing credit card debt
U.S. consumers did a good job of reducing credit card debt during the pandemic. As Experian revealed, the average credit card holder has reduced the balance on the card by almost $ 400 in 2021 compared to 2020. So the chances are high that you are already in debt payment mode. Congratulations!
The first step to repaying a debt is simple: Apply any disposable income to your credit card debt. (And if you don’t have enough available income to start with, don’t panic. I’ll get to that in a minute.)
Where to start? The average American consumer has about three credit cards, so there is a chance that your credit card debt will be spread over multiple balances. There are two popular methods for repaying multiple funds: the snowball method and the avalanche method.
- Snowball method starting by first repaying your smallest debt, regardless of its interest rate, and letting your initial success carry you until you pay off the debt with the largest balance. Proponents of this method claim that this strategy allows you to create the effect of a snowball or momentum that encourages you to pay off more debts.
- Avalanche method, on the other hand, suggests starting with the debt with the highest interest rate. When you repay that high interest balance, you move to the balance with the next highest interest rate, and so on.
Which method is better? Fanatics of the avalanche method – and many personal finance experts – will tell you that paying off debts with high interest rates first makes more sense from a financial point of view. The faster you pay your debt this way, they say, the more money you will save on interest over time. But if repaying that debt will take you years, you may be discouraged by something that seems like minimal progress for maximum effort. You may end up throwing away the towel and continuing to accumulate debt.
My advice is to use a method that will keep you going, whether it’s a snowball, an avalanche, or a combination of both. Lastly, it is important to save money on interest in one way or another.
2. Transfer your balance to a 0% APR credit card
If you have a good credit score, chances are high that you can apply for a credit card balance transfer. Thethey allow you to transfer the balance from another card – as long as it is from another bank – and pay it without interest for a certain period of time, usually between 12 and 18 months. Some cards on the market currently offer up to 21 months.
Be sure to consider the fees when purchasing a balance transfer card. Most cards charge a balance transfer fee, usually 3% of the amount transferred, although some cards do.
Next, use Bankrate’s credit card balance calculator to estimate how long it will take you to repay that balance based on how much you could pay each month. Then look for a card with a similar interest-free promotional period. Keep in mind that when the promotional period ends, the usual APR cards will start, and you will start paying interest on the remaining balance on the card. Consider applying for a card that, by combining balance transfer fees and an introductory period, will allow you to repay your amount for less.
3. Focus on paying off the debt on the card, not on earning points or recovering money
points and miles for everyday purchases and their use for free travel or is the dream of every smart cardholder. But if you carry a balance on your credit cards and continue to charge expenses that you can’t pay at the end of the month to earn points, you need to stop right away.
Here’s why. As I have already mentioned, the current average interest rate is above 16%. Some of the best credit cards earn up to 6% returns in rewards per dollar spent on certain categories, e.g.or . However, most of the best cards with a lump sum refund do not earn more than 2%. Any refunds, points or miles earned will easily be cleared of interest if you do not pay in full for your purchase when you receive the statement.
If you have a balance, there is a way to use well-earned dollars for a refund. Use them to reduce your card balance instead by using them for credit on your statement.
4. Consider additional sources of revenue for credit card debt repayment
But what if you don’t have any extra cash at the end of the day or month to repay the card debt?
That could be the reason why you started out – and that’s fine. We were all there. But adding an extra source of income can help you resolve any type of debt faster, including credit cards.
Here are some ideas to help you earn more disposable income and pay off your credit card debt:
- Take a side gig. Are you good at math or fluent in a foreign language? Tutoring can be a viable option for a side job. Do you have free time during the week and the car is in good condition? Maybe you should consider Uber, Lyft or DoorDash. Many successful Etsy stores started out as a by-product crowd. Think about the activity you enjoy and take care of it because taking a side gig can have tax implications.
- Restrain your expenses. Well, I know – it sounds obvious, but it’s not that simple. According to the Federal Reserve, nearly 40% of Americans do not have $ 400 in cash for emergencies. Whether this is your case or not, it may be time to adjust your expenses to your income, and stick to it. The good news is that you can add card debt repayment as one of your running costs, without having to create a budget from scratch or manage everything yourself. The can help track your spending and identify cost reductions.
- Sell things you don’t use that just stay around the house. From that dress you only wore once at a wedding to the portable sauna you got for your birthday but never catch fire, reselling used and new things online can help you earn the extra money you might need to repay your credit debt. cards. There is plenty of room for that. Penny Hoarder has a good overview of 14 websites and apps for selling things online.
5. Stop using your credit card and switch to cash or debit card
Credit cards are great financial instruments to pay for large or unexpected purchases over time, improve credit, earn points or refund money for travel or dream purchases, or even give you access to generous travel benefits such as. But they can also tempt you to overspend and get into debt quickly if you don’t manage them responsibly.
If you feel you are spending more when you use a credit card, it may be time to give up plastic. Studies suggest that paying by credit card can lead to overspending because the “pain of payment” is removed from the transaction. In other words, when you charge for a purchase with your credit card, the money doesn’t leave your wallet or bank account right away, which can mislead you into thinking you can afford everything you buy.
Switching to cash could be more difficult than before, especially since many companies switched to contactless payment during the pandemic or stopped accepting cash for security reasons.
However, you can use a, such as Venmo or Zelle, or simply your debit card. That way, the moment you make a purchase or pay the bill, the money is immediately withdrawn from your bank account, helping you better understand how much you are spending.
6. Take advantage of your zero percent credit card loan
If you do not currently have a balance on your credit card, congratulations! But if you have good creditworthiness, you might still want to consider applying for a. Even if you pay your full amount each month, there may be some benefits in the midst of rising interest rates. You can pay for the purchase of large interest-free tickets or have a zero percent card on hand in case of an emergency.
Improving your credit utilization ratio and increasing the number of accounts by opening a new credit card can also be beneficial to your credit score. This type of simple move could be of great benefit to you in the long run, especially if you are planning to finance a house, car or some other large purchase in the future.