Borrowed money becomes more expensive as the Federal Reserve raises interest rates to fight inflation.
Why it matters
As interest rates continue to rise, credit card debt will become more difficult in the long run.
What does this mean for you?
To save as much money as possible, you should make a plan to pay off your credit card debt quickly.
In reaction toThe Federal Reserve—the U.S. central bank in charge of monetary policy—initiated several from March. The Fed voted unanimously to raise the federal funds rate again at the end of July, with the next rate hike likely to come in September.
An increase in the federal interest rate has a ripple effect in almost every part of the economy, including financial instruments such as credit cards. Credit card APRs, or interest rates, rise along with Fed hikes. Unfortunately, this can cost you a lot of money if you have credit card debt.
If you have a credit card balance after the due date, it will be subjectdetermined by your particular credit card and . For people who carry a balance from month to month, their interest charges will continue to get more expensive with each rate rise. And you usually won’t get a notification 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 will cause credit card APRs to rise. Although the federal funds rate directly dictates lending between banks, it affects banks’ costs, which are then passed on to consumers.
The prime rate, which is the basis for all interest rates for loans to bank customers, is derived from the federal funds rate. The premium is charged on it depending on the creditworthiness of the applicant and institutional factors. This yields effective interest rates like credit card annual percentage rates.
But when should you expect credit card rates to rise? A credit card’s APR is adjusted almost immediately, usually within one or two billing cycles. You may already have been subject to new APRs from previous rate hikes without 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 this card, it will cost you more to carry it from month to month 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 credit bureau Experian. Meantime,is roughly 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 the balance on the card and cost you over $24,750 in interest.
However, if credit card interest rates were to increase by one percentage point, it would take more than 76 years to pay off the same balance and cost more than $34,400 in interest. Do your own math with CNET sister site Bankrate’s Credit Card Minimum Payment Calculator.
So what should you do right now? Here are six steps you can take to pay off 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 their 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. Kudos to you!
The first step to paying off debt is simple: Apply any disposable income to 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 U.S. 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 of paying off multiple balances: the snowball method and the avalanche method.
- The snowball method start by paying off your smallest debt first, regardless of its interest rate, and let your initial 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, instead suggests that you start with the debt with the highest interest rate. Once you pay off that high interest, 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 financial sense. They say that the faster you pay off your debt this way, the more money you’ll save in interest over time. But if it’s going to take you years to pay off that debt, what seems like minimal progress for maximum effort can discourage you. You may end up throwing in the towel and racking up debt.
My advice is to go with the method that keeps you going, whether it’s snowball, avalanche, or a combination of both. Ultimately, it’s important to save money by avoiding interest charges.
2. Transfer your balance to a 0% APR credit card
If you have a good credit score, chances are you’ll be eligible to apply for a balance transfer credit card. Theallows you to transfer the balance from another card – if it’s from another bank – and pay it off interest-free over a set period, usually 12 to 18 months. Some cards on the market currently offer up to 21 months.
Be sure to consider the fees when shopping for a balance transfer card. Most cards charge a balance transfer fee, usually 3% of the amount being transferred, although some cards charge a fee.
Next, use CNET’s sister site Bankrate’s Credit Card Balance Transfer Calculator 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 zero-interest promotional period. Remember that once the promotion period ends, the card’s regular APR will begin and you’ll start paying interest on the remaining card balance. Consider applying for a card that, combined with balance transfer fees and an introductory period, will allow you to pay off your balance more cheaply.
3. Focus on paying off card debt, not earning points or cash back
points and miles for everyday purchases and exchange them for free trips or is every savvy cardholder’s dream. But if you have a balance on your credit cards and are still charging expenses that you can’t pay at the end of the month because of earning points, you need to stop immediately.
Here’s why. As I mentioned before, the current average interest rate is over 16%. Some of the best credit cards earn up to 6% back in rewards per dollar spent on specific categories likeor . However, most of the best flat rate cash back cards don’t earn more than 2%. Any cash back, points or miles earned will be easily wiped with interest if you don’t pay for your purchases in full by the time your statement is due.
If you’re carrying a balance, there’s a way to put those hard-earned cash-back dollars to good use. Use them to lower 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 don’t have any cash to pay your card debt?
That may be why you went into debt—and that’s okay. We’ve all been there. However, adding another source of income can help you tackle any type of debt faster, including your credit card debt.
Here are some ideas you can try to earn more disposable income and pay off 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 a week off and the car is in good condition? You might want to consider Uber, Lyft, or DoorDash. Many successful Etsy shops started as a side hustle. Consider an activity you enjoy and make sure you do it because taking part in a side gig can have tax implications.
- Limit your spending. Duh, I know — sounds obvious, but it’s not that simple. According to the Federal Reserve, nearly 40% of Americans don’t have $400 in 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 yourself. The can help track your expenses and identify expenses that can be cut.
- Sell things that you don’t use and that are just lying around at home. From that dress you only wore once to your wedding to the portable sauna you got for your birthday but never caught fire, selling used and new items online can help you earn the extra cash you might need to pay off your credit card debt. card. There are plenty of places to do this. The 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 trips or dream purchases, or even give you access to generous travel benefits like. But they can also tempt you to overspend and quickly get into debt if you don’t manage them responsibly.
If you find yourself spending more when using your credit card, it might be time to give plastic a break. 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 your credit card for a purchase, the money doesn’t immediately leave your wallet or bank account, which can trick you into thinking you can afford whatever you’re buying.
The transition to cash may be more difficult than before, especially since many businesses have switched to contactless payments or stopped accepting cash during the pandemic for security reasons.
However, you can use a, such as Venmo or Zelle, or simply your debit card. That way, when you make a purchase or pay a bill, the money is immediately taken out of your bank account, helping you get a better idea of how much you’re spending.
6. Use your credit with a zero percent credit card
If you don’t have a balance on your credit card right now, congratulations! But if you have good credit, you may want to consider applying. Even if you pay your balance in full each month, there may be some benefits amid rising interest rates. You can pay for a big ticket purchase interest-free or have a zero 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 type of simple move could really benefit you in the long run, especially if you plan to finance a house, car or other large purchase in the future.