Borrowed money is getting more expensive as the Federal Reserve raises interest rates to fight inflation.
Why it matters
With ever-increasing interest rate hikes on the way, it’s going to be harder to pay off credit card debt in the long run.
What does that mean for you?
To save the most money, you should make a plan to pay off your credit card debt quickly.
In response toThe Federal Reserve — America’s central bank, which is in charge of monetary policy — launched several since March. Another rate hike is likely next week when the Fed meets on July 26-27. This has an impact on almost every part of the economy, including financial tools like credit cards. Credit card APRs, or interest rates, rise in tandem with Fed hikes. Unfortunately, this could cost you a lot of money if you have credit card debt.
If you have a credit card balance after the due date, that will be an itemdetermined by your specific credit card and . For people who carry a balance from month to month, their interest rates will continue to get more expensive with each rate increase. And you usually won’t get notified if your interest rates go up.
Below we explain how this rate increase will affect your credit card statements, with examples, along with some steps you can take to pay off your balance and.
Why credit card debt is getting more expensive
By raising the federal funds rate — the overnight interest rate between banks — a domino effect causes credit card APRs to rise. Although the federal funds rate only directly dictates lending between banks, it affects bank costs, which in turn are passed on to consumers.
The base rate, which is the basis for all borrowing rates for bank customers, is derived from the federal funds rate. Premiums are attached to it depending on the applicant’s creditworthiness and institutional factors. This gives effective interest rates, such as credit card annual percentage 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 hikes without even realizing it.
If you pay your credit card bill in full each month, you have nothing to worry about. But if you carry a balance on that card, carrying it month after month will cost you more when rates go up.
Here’s an example. Let’s say you have a credit card balance of $5,525, which is the national average according to credit bureau Experian. Meanwhile, theis approximately 20%. If you only make the minimum payment (assume the standard 2% minimum payment), it would take you just over 58 years to pay off your card balance and cost you over $24,750 in interest.
However, if credit card interest rates were to increase by one percentage point, paying off the same balance would take more than 76 years and cost more than $34,400 in interest. Do your math using CNET’s sister site Bankrate’s minimum credit card payment calculator.
So what should you do now? Here are six steps you can take to pay down your credit card balance and save money.
1. Pay off, or at least reduce, any existing credit card debt
American consumers have done a good job of reducing credit card debt during the pandemic. As Experian found, the average credit card holder reduced their card balance by nearly $400 in 2021 compared to 2020. So, chances are you’re already in debt-paying mode. Congratulations!
The first step to paying off debt is simple: Apply any disposable income to your credit card debt. (And if you don’t have enough disposable income to begin 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’s a chance that your credit card debt is spread across multiple balances. There are two popular methods for paying off multiple funds: the snowball method and the avalanche method.
- The snowball method starting by paying off your smallest debt first, 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 a snowball effect or momentum that encourages you to pay off more debt.
- Avalanche method, on the other hand, suggests starting with the debt with the highest interest rate. When you pay off that high-interest balance, you move on to the balance with the next highest interest rate, and so on.
Which method is better? Avalanche fanatics — and many personal finance experts — will tell you that paying off high-interest debt first makes more financial sense. The faster you pay off your debt this way, they say, the more money you’ll save on interest over time. But if it’s going to take years to pay off that debt, you may be discouraged by what seems like minimal progress for maximal effort. You may end up throwing in the towel and continuing to pile up debt.
My advice is to use a method that will sustain you, whether it’s a snowball, an avalanche, or a combination of both. In the end, it’s important to save money on interest one way or another.
2. Transfer your balance to a 0% APR credit card
If you have a good credit score, chances are you can apply for a balance transfer credit card. Thethey allow you to transfer a balance from another card — as long as it’s from another bank — and pay it off interest-free over a set 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.
Then, use Bankrate’s balance transfer calculator on CNET’s sister site to estimate how long it will take you to pay off that balance based on how much you might pay each month. Then look for a card with a similar interest-free promotional period. Keep in mind that once the promotional period ends, the card’s regular APR will begin and you’ll start paying interest on the remaining balance on the card. Consider applying for a card that combines balance transfer fees and an introductory period to allow you to pay off your balance for less.
3. Focus on paying off your card debt, not earning points or cash back
points and miles for everyday purchases and use them for free travel or is the dream of every smart cardholder. But if you’re carrying balances on your credit cards and keep running up charges you can’t pay at the end of the month to earn points, you need to stop now.
Here’s why. As I mentioned before, the current average interest rate is above 16%. Some of the best credit cards earn up to 6% in rewards per dollar spent on certain categories, such asor . However, most of the best flat cash back cards don’t earn more than 2%. Any cash back, points or miles earned will easily be wiped out with interest if you don’t pay your purchases in full when your statement is due.
If you have a balance, there’s a way to put your hard-earned cashback dollars to good use. Use them to lower your card balance instead by using them for statement credit.
4. Consider additional sources of income to pay off credit card debt
But what if you don’t have any extra cash at the end of the day or month to pay off your card debt?
That might be why you went into debt to begin with — and that’s okay. We’ve all been there. But adding an extra source of income can help you pay off any type of debt faster, including credit card debt.
Here are some ideas you can try to earn more disposable income and pay off your credit card debt:
- Get a side gig. Are you good at math or fluent in a foreign language? Tutoring can be a viable side job option. Do you have free time during the week and a car in good condition? Maybe you should consider Uber, Lyft, or DoorDash. Many successful Etsy shops started as side hustles. Think about an activity you enjoy and make sure you do it because taking on a side gig can have tax implications.
- Control your expenses. Well, I know — it sounds obvious, but it’s not that simple. According to the Federal Reserve, nearly 40% of Americans don’t have $400 in emergency cash. Whether this is the case for you or not, it may be time to align your expenses with your income, and stick to it. The good news is that you can add paying off your card debt as one of your ongoing expenses, and you don’t have to create a budget from scratch or manage it all yourself. The can help track your spending and identify costs to cut.
- Sell things you don’t use and are just sitting around the house. From that wedding dress you only wore once to the portable sauna you got for your birthday but never caught fire, reselling used and new items online can help you earn the extra cash you might need to pay off your credit card debt. card. There’s plenty of room for that. Penny Hoarder has a good roundup of 14 websites and apps for selling stuff online.
5. Stop using your credit card and switch to cash or a debit card
Credit cards are great financial tools to pay for large or unexpected purchases over time, improve your credit, earn points or cash back for your dream trips or purchases, or even give you access to generous travel perks like. But they can also tempt you to overspend and quickly go into debt if you don’t manage them responsibly.
If you find yourself spending more when you use your credit card, it might be time to ditch the plastic. Studies suggest that paying with a credit card can lead to overspending because the “pain of paying” is removed from the transaction. In other words, when you charge a purchase to your credit card, the money doesn’t leave your wallet or bank account right away, which can trick you into thinking you can afford whatever you buy.
The transition to cash could be more difficult than before, especially since many companies switched to contactless payments 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 a bill, the money is immediately withdrawn from your bank account, helping you to better understand how much you’re spending.
6. Use your credit with a zero percent credit card
If you currently have no credit card balance, congratulations! But if you have good credit, you might still want to consider applying for a. Even if you pay your balance in full each month, there may be some benefits amid rising interest rates. You can pay for big-ticket purchases interest-free or keep a zero percent card handy in case of an emergency.
Improving your credit utilization ratio and increasing the number of accounts by opening a new credit card can also benefit your credit score. This kind of simple move could pay off big in the long run, especially if you’re planning to finance a house, car or other big purchase in the future.