To bring inflation down, the Federal Reserve raised its key rate by three-quarters of a percentage point, its biggest hike in nearly 30 years. One of the implications of this decision is that interest on credit card debt will increase.
What will the Federal Reserve rate hike mean for consumers?
The average credit card interest rate is now over 20%, according to Matt Schulz, chief credit analyst at Lending Tree. “The worst news for cardholders when the Fed raises rates is that they don’t just raise rates on the things you buy in the future,” Schulz said. “The rate you pay on your current balances also increases, usually within a billing cycle or two.”
Maybe you’ve kept your credit card debt like a pet, biting it off bit by bit with minimum payments or occasionally throwing extra cash at the balance. Or maybe your financial situation has 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 increases that are likely to come.
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1. Stop charging your credit cards. Have you ever heard of the expression “If you’re in a hole, stop digging?” » You should stop using your credit cards if you don’t pay off balances each month. Also consider that whatever you’ve been billing for, whether it’s a TV, dinner, vacation, or clothes, will end up costing you more money in the long run if you keep rolling over debt. .
The share of credit card revolvers, or those who carry a monthly balance, rose 0.6 percentage points to 40.1% nationally in the fourth quarter of 2021, the American Bankers Association reported on last month. The Fed has said it expects more rate hikes if it can’t get inflation under control.
“What really matters is that all of these rate hikes come on top of potential multi-percentage-point increases in credit card rates in a single year,” Schulz said. “So many people’s financial margin of error is tiny anyway. The last thing they need with their grocery bills and rising gas prices is for their credit card interest rates to rise.
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2. Start paying the smallest balance. The question I often get when it comes to credit card debt is, should I pay off my credit cards with the highest interest rate first or the one with the lowest balance first?
On paper, the logical method would be to go into debt at the highest interest rate. But what works on paper doesn’t always work in practice. The debt reduction method that I recommend is what I call the “debt dash method”. With this, like a 100-yard dash, the goal is to make a super-fast run to debt.
In my experience I have helped hundreds of people pay off their credit card debt, their motivation to get rid of debt increases when they get a quick win. The result is that they become more aggressive in tackling what remains of the debt, ultimately paying less interest charges than if they had started with the card with the highest interest rate. Part of the battle for debt reduction is sticking to a plan.
With the debt dash, you list all your debts starting with the one with the lowest balance. Then, use any extra cash you can find to apply it to that first card on your list while making minimum payments on all other debts. Once you’ve eliminated that card, move on to the next one on your list, and so on. If two cards have a similar balance, the one with the higher interest rate gets priority processing.
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3. Transfer balances to a zero percent card. If you have good credit, you may qualify for an offer that lets you transfer your balances to a card with zero percent interest for a limited time. Zero percent balance transfer offers are still plentiful, Schulz said. “We’re even seeing a few select cards offering a full 24 months interest-free,” he said.
But as the Fed continues to raise rates and delinquency rates rise, those offers are likely to be hit going forward, Schulz said. Instead of being able to find deals for 15 to 20 months interest-free, consumers may end up finding zero percent interest for 9 to 12 months, he said.
Generally, these cards are available to people with credit scores of 670 or higher, according to Ted Rossman, senior industry analyst at Bankrate.com and CreditCards.com. “The average FICO score is 716, so most people should be able to qualify,” he said.
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4. Talk to your credit card issuer. Talking ain’t cheap when it comes to credit card debt. Many borrowers struggling with the weight of their Debts never ask for help, according to Bruce McClary, senior vice president of membership and communications at the National Foundation for Credit Counseling.
Before calling your creditor, check your credit report and credit score, McClary said. It helps to know the strength of your negotiating position. “You want to make sure you know exactly what you’re going to say to the creditor, to start the conversation about finding more affordable options,” he said. “Use a high credit score to your advantage.”
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Maybe when you first got your card your credit history wasn’t great, so you were offered a card with a high rate. But with on-time payments, you could now qualify for more affordable terms or even an interest-free credit card rate, McClary said.
“It’s a huge win because then you can start planning the power to pay off the balance while you have that interest-free repayment period,” he said. “But these offers go to people with the best credit ratings.”
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 the interest rate. But don’t just focus on the monthly payment, warns McClary. “What you don’t want to do is tinker with the terms so that you have this artificially low payout,” he said.
You might get a lower monthly payment, but you could drag out the loan for years and end up paying more interest over time than your issuer was charging.
6. Contact a non-profit consumer credit counselor. If you don’t feel comfortable negotiating with your card issuer, get help from a nonprofit credit counseling agency by visiting the National Foundation for Credit Counseling or calling 800- 388-2227.
By working with a credit counselor, you can put a debt management plan in place. You make a lump sum payment each month to the nonprofit, which then forwards the payments to your creditors. By participating in this type of debt management program, you may benefit from reduced or waived finance charges or fees.
7. Treat bankruptcy as a last resort. I’ve helped a few seniors overwhelmed with credit card debt for bankruptcy protection. For them, the credit had become the bridge to extending their Social Security retirement benefit checks. This is how they were able to make ends meet. Bankruptcy gave them a fresh start.
Ask for recommendations for a bankruptcy attorney or use the National Association of Consumer Bankruptcy Attorneys’ Find An Attorney database.