Rising interest rates have pushed the annual percentage rates on credit cards to new heights.
The average annual percentage rate on a new credit card is now more than 20%, according to LendingTree’s tracker. It is the first time that rates have gone up 20% since the tracker started in 2018.
“When you consider that the cost of everything seems to increase on a daily basis, the last thing consumers need is that credit card rates reach a new high, but that’s where we are,” Matt said. Schulz, chief credit analyst at LendingTree.
And rates are poised to go even higher across the board.
The Federal Reserve raised its benchmark rate by 0.75 percentage points in June, the largest increase in 28 years, signaling that it will increase rates year-round to curb inflation.
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The rates that consumers pay on credit card debt follow very closely the actions of the Fed, according to Schulz.
“The chances are high that we are nowhere near where rates are going up,” he said.
That could pose a problem for Americans with exceptional accounts.
Credit card balances reached $ 841 billion in the first three months of the year, according to a report from the Federal Reserve Bank of New York. In the same time frame, 229 million people opened new credit card accounts, an increase from the previous quarter.
Look for lower rates to pay off debt
It’s a great idea to try to tackle exceptional credit card debt, if you have it, to avoid paying more on that balance when those interest rates go up.
“The biggest key to getting out of credit card debt is not paying high interest on that debt,” said Suze Orman, a personal finance expert.
One of the first steps Orman recommends for those looking to chip in credit card debt is to see if you can lower your interest rates.
Doing so will help you pay off your debt faster and ensure that more of your money goes to paying off what you owe, instead of collecting interest.
There are a few ways to do this, such as transferring a balance to another credit card with 0% interest for a certain period, taking out a personal loan with a lower interest rate to pay off your credit balance or working with a credit counselor to consolidate your debt with a lower rate.
These options will depend on your personal situation and your credit score, Orman said.
For those with lower scores, she recommends contacting the National Foundation for Credit Counseling for help lowering your interest rates and getting a payment plan.
Choose a refund method
If you pay your debts while keeping your cards open, there are generally two methods people use to clear a balance, according to John Scherer, a certified financial planner and founder of Trinity Financial Planning in Madison, Wisconsin.
One is to round off all your outstanding debts by balance and start paying off the smallest.
“Then you get momentum,” Scherer said. “You see some of those things fall out of the books, and it feels really good.”
The second model, which Scherer personally recommends to clients, is to look at all of your outstanding debt and first pay the one with the highest interest rate. Over time, this means that you will pay less money to eliminate your debt, because you are immediately approaching the highest interest rates.
Orman recommends this approach as well.
She says to accrue your credit card debt and add up all the minimum payments each month. Then add 20% or more to your total payment and apply it to the debt with the highest interest rate. Once that is paid, roll that extra payment to the next card, and then the next one until everything is cleared.
In addition to paying off your debt, make sure you set aside some money to build up emergency reserves, Scherer said. This is to prevent you from accumulating more debt while you work to pay off your existing balance.
“You get paid for it, but then the transfer blows or the refrigerator takes a dump on you and now you’re back on the credit card for another thousand dollars,” he said.
If you want to keep your credit cards open so you do not spoil your credit score but do not use them as much, Orman suggests that you hide them for yourself.
“What you might want to do is take all your credit cards, put them in a plastic bag and put them in the freezer,” she said. “Do not deceive yourself.”
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