Collectively, Americans owe more on credit cards than ever before. And they’re paying a higher price for it, as well.
The average annual interest rate for credit cards is now near 21%, according to data from the Federal Reserve — marking the highest rate since the Fed began tracking this figure nearly three decades ago.
According to the recent NerdWallet study, with rates at record highs, households carrying credit card debt will pay an average of $1,380 in interest alone this year — up from $1,029 last year.
The Federal Reserve is increasing rates to curb inflation, resulting in higher borrowing costs. With the possibility of another rate hike in the future, the average APRs for credit cards could continue to increase in the coming months.
The exorbitant APRs associated with credit cards make them one of the most expensive means of borrowing money on a monthly basis. Nonetheless, there are several methods and strategies that can be used to reduce outstanding balances.
Here are the three steps experts most often recommend.
1. Start using balance transfer cards
Credit cards that offer 0% interest on balance transfers for 15, 18, or even 21 months can be incredibly useful for individuals who are seeking to get out of credit card debt. By taking advantage of these offers, borrowers can avoid interest charges and additional rate hikes during the introductory period, giving them some breathing room to pay down their debt.
However, it’s important to note that the real work comes after the introductory period ends. To make the most of a balance transfer offer, it’s crucial to make timely payments and pay down the balance aggressively within the promotional period.
If borrowers are unable to pay off the balance before the introductory period expires, the remaining balance will be subject to a higher APR, typically around 23% on average, which is similar to the rates offered for new credit. Additionally, there may be limits on the amount that can be transferred, and fees may be charged for each transfer. Most cards also have a one-time balance transfer fee, which usually ranges from 3% to 5% of the total balance. Furthermore, even a single late payment can nullify the no-interest offer, which could be costly for the borrower.
In summary, balance transfer offers with 0% interest rates can be an effective tool for tackling credit card debt, but it’s crucial to make payments on time and pay down the balance aggressively during the promotional period. Borrowers should also be aware of any limits or fees associated with the offer and strive to avoid late payments to maintain the benefits of the offer.
2. Consider a personal loan
If balance transfer offers are not a viable option for managing credit card debt, borrowers can consider taking out a debt consolidation loan. A debt consolidation loan is a type of personal loan that enables borrowers to combine the interest from multiple credit cards into one low-interest fixed payment. The interest rate for the loan will depend on the borrower’s creditworthiness, but it may be beneficial if the cost of interest and fees is significantly lower than what they’re currently paying on their credit cards.
The average interest rate for debt consolidation loans is currently around 10%, which is typically much lower than the rates charged by credit card companies. This means that borrowers may be able to save a considerable amount of money on interest charges over time.
In addition, consolidating debt with a personal loan may make budgeting easier for borrowers. Instead of juggling multiple credit card payments with varying interest rates and due dates, they will have a fixed monthly payment to make until the debt is fully paid off.
It’s important to note that debt consolidation loans may have origination fees, and borrowers should be aware of any potential penalties for early repayment. However, with responsible use, a debt consolidation loan can be an effective tool for managing credit card debt and improving overall financial health.
3. Employ a debt-payoff method
To stay motivated while paying off debts, experts suggest having a strategy in place. Two common methods are the avalanche and snowball methods. With the avalanche method, you list your debts from highest to lowest interest rate, and pay off the ones with the highest interest rate first. This way, you can save more on interest in the long run.
On the other hand, with the snowball method, you prioritize paying off your smallest debts first, regardless of the interest rate. The idea is that by gaining momentum as you pay off smaller debts, you will be motivated to keep going and tackle larger debts.
In either case, you need to make the minimum payments on all debts each month and put any extra money towards one debt to accelerate the repayment process. The avalanche method will help you save more money in interest, but if you want to stay motivated by seeing results early on, then the snowball method may be more useful for you.
Regardless of which method you choose, it is essential to stay motivated and disciplined throughout the process. You may also consider seeking advice from a financial expert or credit counselor to help you develop a plan that fits your specific situation.
