Interest rates are constantly rising: why you should pay off your credit card now

In reaction to rising inflationThe Federal Reserve – the US central bank in charge of monetary policy – has initiated several increase in interest rates from March. This has a ripple effect in almost every part of the economy, including financial instruments such as credit cards. As it is more expensive for banks to borrow money from each other, lending to consumers is consequently more expensive for banks. This leads to an increase in APR credit cards or interest rates. Unfortunately, this can mean that you personally absorb higher costs.

If you have a credit card balance after the due date, it will be subject to it APR determined by your specific credit card and credit score. For people who have a balance from month to month, their interest rates will continue to become more expensive with each rate increase. And you usually don’t get an alert if your interest rates go up.

Below we will explain how this rate increase will affect your credit card statements, with examples, along with some steps you can take to keep your balance and save money.

Why credit card debt is becoming more expensive

By raising the rate of federal funds – one-day interest rates between banks – the domino effect will cause an increase in APR credit cards. Although the federal funds rate directly dictates lending between banks, it affects the costs for banks, which are then passed on to consumers.

The base rate, which is the basis of all interest rates on loans to bank customers, is derived from the federal funds rate. Premiums are charged depending on the applicant’s creditworthiness and institutional factors. This delivers effective interest rates such as annual credit card percentage rates.

But when should you expect credit card rates to rise? Credit card APRs are adjusted almost immediately, usually within one or two billing cycles. You have probably already been subject to the new APRs from previous rate increases without realizing it.

If you pay your entire credit card bill every month, you have nothing to fear. But if you have a balance on this card, transferring it from month to month will cost you more once the rates increase.

Here is an example. Let’s say you have a credit card balance of $ 5,525, a national average, according to Experian. Meantime, average interest rate on a new credit card is about 20%. If you make only the minimum payment (assuming the minimum payment is a standard 2%), it would take you just over 58 years to repay the balance on your card, and it would cost you more than $ 24,750 in interest.

However, if credit card interest rates were raised by one percentage point, repaying the same balance would take more than 76 years and cost more than $ 34,400 in interest. Do your own math using CNET Bankrate’s sister website on the minimum credit card payment calculator.

So what should you do right 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

US consumers have done a good job of reducing credit card debt during the pandemic. Experian found that the average credit cardholder reduced their card balance by almost $ 400 in 2021 compared to 2020. So it’s likely that you’re already in debt mode. Glory to you!

The first step to paying off debt is simple: Use any disposable income for 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 consumer in the US 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 of paying off multiple balances: the snowball method and the avalanche method.

• Snowball method suggests start by paying off your smallest debt first, regardless of its interest rate, and let your initial success carry it until you pay off the debt with the highest balance. Proponents of this method argue that this strategy allows you to create a snowball effect or impulse that will encourage you to pay off several debts.
• Avalanche method, on the contrary, suggests that you start with the debt with the highest interest rate. Once you pay this high interest rate, you move on to the balance with the next highest interest rate and so on.

Which method is better? Avalanche fans – and many personal finance experts – will tell you that paying off high-interest debt makes more sense financially. It is said that the faster you pay your debt this way, the more money you will save on interest over time. But if repaying this debt will take you years, you may be discouraged by what seems like minimal progress for maximum effort. You can end up throwing a towel in the ring and you will grow debts.

My advice is to go with a method that will keep you going, whether it’s a snowball, an avalanche or a combination of both. Ultimately, it is important to save money on interest one way or another.

2. Transfer your balance to your credit card with 0% APR

If you have a good credit score, you are likely to be eligible to apply for a credit card to transfer your balance. The best balance transfer cards It allows you to transfer the balance from another card – if it is from another bank – and pay it without interest for a set period of time, usually 12 to 18 months. Some cards currently offer up to 21 months on the market.

Be sure to consider charges when purchasing a balance transfer card. Most cards charge a balance transfer fee, usually 3% of the amount transferred, although some cards charge a fee no balance transfer fees.

Next, use CNET Bankrate’s sister card Credit Card Balance Transfer Calculator to estimate how long it will take you to repay this balance based on how much you could pay each month. Then look for a card with a similar promotional period with zero interest. Remember that once the promotion period ends, the regular APR card will start and you will start paying interest on the remaining balance on the card. Consider applying for a card that will allow you to pay your balance cheaper thanks to a combination of balance transfer fees and an initial period.

3. Focus on paying off the debt on the card, not on earning points or cash back

Make money backpoints and miles for everyday shopping and exchanging them for free trips or latest smartphone is the dream of every savvy cardholder. But if you have a balance on your credit cards and you still charge expenses that you can’t pay at the end of the month to earn points, you must stop immediately.

Here’s the reason. As I mentioned, the current average interest rate is above 16%. Some of the best credit cards earn up to 6% back on dollar rewards spent on specific categories such as grocery shopping or tickets. However, most of the best flat rate cash back cards do not earn more than 2%. Any cash back, points or miles earned will be easily erased by interest if you do not pay in full for your purchases by the due date of the statement.

If you carry a balance, there is a way to make good use of these hard-earned cash-backing dollars. Use them to reduce your card balance by exchanging them for a credit statement.

4. Consider other sources of income to pay off credit card debt

But what if at the end of the day or month you have no cash to pay the debt on the card?

That may be why you got into debt – and that’s okay. We were all there. However, adding another source of income can help you resolve any type of debt faster, including your credit card debts.

Here are some ideas you can try to earn more disposable income and pay off credit card debt:

• Take a side concert. Are you good at math or fluent in a foreign language? Tutoring can be a viable option for side work. Do you have a week off and your car in good condition? You may want to consider Uber, Lyft or DoorDash. Many of Etsy’s successful deals began as a side rush. Consider the activity you enjoy and make sure you do it follow these tipsbecause attending a side concert could have tax consequences.
• Limit your expenses. Duh, I know – it sounds clear, but it’s not that simple. According to the Federal Reserve System, almost 40% of Americans do not have $ 400 in cash. Whether it’s your case or not, maybe it’s time to reconcile your expenses with your income, create a budget and stick to it. The good news is that you can add card repayment as one of your ongoing expenses and you don’t have to create a budget from scratch or manage it yourself. The the best budget application It can help track your spending and identify expenses that need to be reduced.
• Sell ​​things you don’t use that just lie at home. From the dresses you only wore once at the wedding to the portable sauna you got for your birthday, but never got burned out, reselling used and new items online can help you make the extra money you may need to pay off debt. credit card. There are plenty of places to do this. The Penny Hoarder has a good overview of 14 websites and applications for selling things online.

5. Stop using your credit card and switch to cash or debit card

Credit cards are great financial tools for paying for big or unexpected purchases over time, for improving your credit, earning points or cash back for trips or dream purchases, or even giving you access to generous travel benefits, such as airport lounges or priority security access. But they can also tempt you to spend too much and get in debt quickly if you don’t manage them responsibly.

If you find that you spend more using a credit card, it may be time to take a break from the plastics. Studies suggest that credit card payments can lead to excessive spending, as the transaction eliminates “pain of paying”. In other words, when you charge a purchase to your credit card, the money will not immediately leave your wallet or bank account, which may lead you to believe that you can afford anything you buy.

The cash switch may be more difficult than before, especially since many businesses switched to contactless payments or stopped accepting cash during a pandemic.

However, you can use and P2P payment applicationsuch as Venmo or Zelle, or simply your debit card. This way, when you make a purchase or pay an account, the money is immediately deducted from your bank account, which helps you get a better idea of ​​how much you are spending.

6. Use your credit with a zero percent credit card

If you do not have a balance on your credit card, congratulations! But if you have good credit, you may want to consider applying interest-free credit card. 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 for the purchase of a large ticket without interest or have a zero percent card on hand in case of emergency.

Improving your credit usage ratio and increasing your account number by opening a new credit card can also benefit your credit score. This type of simple move could be really beneficial for you in the long run, especially if you plan to finance a house, car or other large purchase in the future.

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