What is happening
Borrowing money becomes more expensive as the Federal Reserve raises interest rates to fight inflation.
Why is it important?
With more interest rate hikes on the way, credit card debt will be harder to pay off in the long run.
What does it mean to you?
To save the most money, you need to make a plan to pay off your credit card debt quickly.
as an answerThe Federal Reserve System (FED), the central bank responsible for monetary policy in the United States, began to implement a number of measures. since March. Another rate hike is likely next week when the Fed meets on July 26 and 27. This has a ripple effect in almost every part of the economy, including financial instruments like credit cards. Credit card APRs, or interest rates, rise in tandem with the Fed’s hikes. Unfortunately, if you have credit card debt, it can cost you a lot of money.
If you carry a credit card balance after the due date, it will be subject to the followingdetermined by your specific credit card and . For people with month-to-month balances, interest payments will continue to get more expensive with each rate hike. You usually won’t get a notification if your interest rates go up.
Below are examples of how this interest rate increase will affect your credit card statements, as well as some steps you can take to pay off your balance and.
Why is credit card debt getting expensive?
By raising the federal funds rate — the overnight interest rate between banks — the domino effect causes credit card APRs to rise. While the federal funds rate directly dictates lending between banks, it affects banks’ costs, which in turn are passed on to consumers.
The prime rate, which is the basis for all borrowing rates for bank customers, is derived from the federal funds rate. Awards are calculated depending on the applicant’s creditworthiness and institutional factors. This gives effective interest rates similar to credit card annual interest rates.
But when should you expect credit card interest rates to rise? Credit card APRs adjust almost instantly, usually within one or two billing cycles. You may have already been hit with new APRs from previous interest rate hikes without even realizing it.
If you pay your credit card bill in full every month, you have nothing to worry about. But if you have a balance on that card, it will cost you more to transfer it from month to month after the rates increase.
Here is an example. Let’s say you have a credit card balance of $5,525, according to credit bureau Experian. In the meantime,is about 20%. If you only make the minimum payment (let’s say the minimum payment is the standard 2%), it will take you a little over 58 years to pay off your card balance and cost you more than $24,750 in interest.
However, if credit card interest rates were to increase by one percentage point, the same balance would take more than 76 years to pay off and cost more than $34,400 in interest. Do your own math using CNET sister site Bankrate’s credit card minimum payment calculator.
So what should you do now? Here are six steps you can take to pay off your credit card balance and save money.
1. Pay off or at least lower existing credit card debt
US consumers have done well to reduce credit card debt during the pandemic. Experian found that the average credit card holder reduced their card balance by nearly $400 in 2021 compared to 2020. So you are already in debt repayment mode. Thank you!
The first step to paying off your debt is simple: apply disposable income to credit card debt. (And don’t panic if you don’t have enough disposable income to get started. I’ll get to that in a minute.)
Where to start? The average US consumer has about three credit cards, so there’s a good chance your credit card debt is spread across multiple balances. There are two popular methods for paying off multiple balances: the snowball method and the avalanche method.
- The snowball method start by paying off the smallest debt first, regardless of interest rate, and let your first success carry you until you pay off the debt with the highest balance. Proponents of this method claim that this strategy allows you to create a snowball effect, or momentum that encourages you to pay off multiple debts.
- Avalanche method, on the other hand, suggests starting with the debt with the highest interest rate. Once 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 method fanatics and many personal finance experts will tell you that paying off high-interest debt first makes more financial sense. This way, the sooner you pay off your debt, the more money you’ll save in interest over time, they say. But if it will take you years to pay off that debt, what seems like minimal progress for maximum effort can be discouraging. In the end, you can throw in the towel and continue collecting debt.
My advice is to go with the method that keeps you going, whether it’s a snowball, an avalanche, or a combination of both. Ultimately, what matters is saving on interest in one way or another.
2. Transfer your balance to a 0% APR credit card
If you have good credit, you may be able to apply for a balance transfer credit card. Theallow you to transfer the balance from another card — as long as it’s from another bank — and pay it off interest-free over a period of time, usually between 12 and 18 months. Some cards on the market currently offer up to 21 months.
Be sure to consider fees when shopping for a balance transfer card. Most cards charge a balance transfer fee, usually 3% of the amount transferred, although some cards have a fee.
Then, based on how much you can pay off each month, use CNET sister site Bankrate’s Credit Card Balance Transfer Calculator to estimate how long it will take you to pay off that balance. Then look for a card with a similar zero interest promotional period. Remember that after the promotional period ends, the card’s regular APR will kick in and you’ll start paying interest on any remaining balance on the card. Consider applying for a card that will allow you to pay off your balance less by combining balance transfer fees and an introductory period.
3. Focus on paying off card debt, not earning points or cash back
points and miles on everyday purchases and redeem them for free trips or every savvy is a cardholder’s dream. But if you’re carrying balances on your credit cards and keep running up charges that you can’t afford at the end of the month just to earn points, you should stop right away.
Here’s why. As I mentioned earlier, the average interest rate is currently above 16%. Some of the best credit cards earn rewards of up to 6% per dollar spent on certain categories.or . However, most of the best flat rate cash back cards don’t earn more than 2%. If you don’t pay your purchases in full when your statement is due, any cash, points or miles earned will easily be written off with interest.
If you have a balance, there’s a way to put your hard-earned cash to good use. Use them to pay back for a statement credit to reduce the balance on your card.
4. Consider additional sources of income to pay off credit card debt
But what if you don’t have extra cash to pay off your card debt at the end of the day or month?
That may be why you borrowed money 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, including credit card debt, faster.
Here are a few ideas you can try to generate more disposable income and pay off credit card debt:
- Take the side gig. Are you good at math or fluent in a foreign language? Tutoring can be a viable option for extra work. Do you have free time during the week and a car in good condition? You might think of Uber, Lyft, or DoorDash. Many successful Etsy shops started as a side hustle. Think of an activity you like and be sure because taking on a side gig can have tax implications.
- Control your spending. Duh, I know – it sounds obvious, but it’s not that simple. According to the Federal Reserve, almost 40% of Americans do not have $400 in emergency cash. Whether or not this is the case for you, maybe it’s time to match your spending to 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 need to create a budget from scratch or manage it all yourself. The can help you track your spending and identify costs to cut.
- Sell things you don’t use sitting at home. From the wedding dress you only wore once to the portable sauna you bought for your birthday but never lit up, selling both used and new items online can help you earn the extra cash you might need to pay off credit card debt. There are plenty of places to do that. Penny Hoarder has a good collection of 14 websites and apps to sell your products online.
5. Stop using your credit card and switch to a cash or 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 trips or dream purchases, or even give you access to generous travel benefits.. However, if you don’t manage them responsibly, they can lead you to overspend and get into debt quickly.
If you find yourself spending more when using a credit card, maybe it’s time to give the plastic a break. Research shows that paying with a credit card can lead to overspending because the “pain of payment” is taken out of the transaction. In other words, when you make a purchase with your credit card, the money doesn’t come out of your wallet or bank account right away, which can make you think you can pay whatever you cheat on.
The transition to cash may be more difficult than before, especially during the pandemic as many businesses switch to contactless payments for security reasons or stop accepting cash.
However, you can use it, like Venmo or Zelle or just 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 better understand how much you’re spending.
6. Use your credit with a zero interest credit card
If you currently have no balance on your credit card, congratulations! But if you have good credit, you may still want to consider applying for one. Even if you pay your balance in full each month, there may be some benefits in the midst of rising interest rates. You can pay off a big-ticket purchase interest-free, or have a zero-interest card handy for emergencies.
Improving your credit utilization ratio and increasing your number of accounts by opening a new credit card can also benefit your credit score. This kind of simple action can really benefit you in the long run, especially if you are planning to finance a house, car or other big purchase in the future.