Michelle Singletary: 7 ways to lower your credit card debt after the Fed rate hike
It is the worst debt to carry in good times. It can be even more oppressive when the economy is battling high inflation and interest rates are rising.
Got credit card debt?
Now is the time to develop a plan to pay down this debt as soon as possible, because it will get even more expensive.
“Rising rates, high inflation and high balances are a tough combination,” said Ted Rossman, senior industry analyst at Bankrate.com and CreditCards.com. “We could soon be looking at all-time highs for credit card rates and balances.”
The average annual percentage range on a new credit card offer is roughly 19.93% according to data from Bankrate.com.
“The worst news for cardholders when the Fed raises rates is that it doesn’t just raise rates on things you buy in the future,” Matt Schulz, chief credit analyst at Lending Tree. “The rate you pay on your current balances goes up, too, usually within a billing cycle or two.”
Even consumers with the best credit scores can expect higher interest rates on their cards, Schulz said.
Maybe you’ve been keeping your credit card debt around like a pet rock, pecking at it little by little with minimum payments or occasionally throwing some extra cash at the balance. Or perhaps your financial circumstances forced you to rely on credit to make ends meet. Whatever your situation, here are seven ways to lower your credit card debt in light of the latest Fed rate hikes and additional increases that probably are coming.
1. Stop charging to your credit cards. Ever heard of the expression, “If you’re in a hole, stop digging?” You’ve got to stop using your credit cards if you aren’t paying off the balances every month. Also, consider that whatever you charged, whether a television, dinner, vacation or clothes, will end up costing you more money in the long run if you keep revolving the debt.
I think the most concerning aspect of the latest increase is the cumulative effect. I think the Fed is doing the right thing to fight inflation, but as Chair Jerome H. Powell has said, there is some pain associated with that. Credit card debt is a good example.
The share of credit card revolvers, or those who carry over a monthly balance, was 40.3% nationally in the second quarter of 2022, according to the American Bankers Association.
“What really matters is all of these rate hikes adding up to potentially multiple percentage-point increases in credit card rates in a single year,” Schulz said. “So many people’s financial margin for error is tiny anyway. The last thing they need with their grocery bills going up and their gas prices going up is to have their interest rates go up on their credit card.”
2. Start paying off the smallest balance. The question I often get when it comes to credit card debt is: Should I pay off my credit cards with the highest interest rate first or start with the one with the smallest balance?
On paper, the logical method would be to go after debt with the highest interest rate. But what works on paper doesn’t always work in practice. The debt reduction strategy I recommend is what I call the “debt dash method.” With this, like a 100-meter dash, the goal is to make a fast run at the debt.
In my experience helping hundreds of people pay off credit card debt, their motivation to get rid of the debt picks up when they get a quick victory. The result is that they become more aggressive in attacking what is left of the debt, ultimately paying less in interest charges than if they had started on the card with the highest interest rate. Part of the battle of debt reduction is sticking to a plan.
With the debt dash, you list all your debts, starting with the one with the lowest balance. Then use any extra money you can find to apply it to that first card on your list while making the minimum payments on all other debts. Once you’ve knocked off that card, go after the next one on your list, and so on. If two cards have a similar balance, the one with the higher interest rate gets priority treatment.
3. Transfer balances to zero percent card. If you have good credit, you may qualify for an offer that allows you to transfer your balances to a card with a zero percent interest rate for a limited time.
“It’s kind of amazing that zero percent balance transfer cards are this plentiful considering how much interest rates have risen, Schulz said. “And honestly, there really aren’t any signs that that is going to change any time soon.”
The longest offer for a zero percent card is 21 months, Schulz said. The vast majority of the offers are for 12 or 15 months.
Be sure to watch the fees. You may have to pay more to transfer your balance to a zero-percent card.
“We’ve also seen a small uptick in the number of cards charging 4% or 5% for a balance fee instead of 3%, which is still the most common,” Schulz said.
Generally, these cards are available to people with credit scores of 670 or higher, according to Rossman.
“The average FICO score is 716, so most people should be able to qualify,” he said.
4. Talk to your credit card issuer. Talk is not cheap when it comes to credit card debt. Many borrowers struggling under the weight of their debt never ask for help, according to Bruce McClary, senior vice president of communications at the National Foundation for Credit Counseling.
Before calling your creditor, check your credit report and credit score, McClary said. It helps to know how strong a negotiating position you have.
“You want to make sure you know exactly what you’re going to say to the creditor to tee up the conversation about finding more affordable options,” he said. “Use a high credit score to your advantage.”
Perhaps when you first got your card, your credit history wasn’t great, so you were offered a card with a high rate. But with on-time payments, you might now qualify for more affordable terms or even an introductory interest-free credit card rate, McClary said.
“That is a huge win because then you can start to plan on power-paying the balance while you have that interest-free repayment period,” he said. “But those offers go to people with the best credit scores.”
5. Use debt consolidation or a personal loan. It makes sense to consolidate the debt and make one payment, especially if you can reduce the interest rate. But don’t just focus on the monthly payment, McClary warns.
“What you don’t want to do is tinker with the terms so that you have this artificially low payment,” he said.
You might get a lower monthly payment, but you might be dragging out the loan for years and end up paying more interest over time than what your issuer was charging.
6. Contact a nonprofit consumer credit counselor. If you don’t feel comfortable negotiating with your card issuer, get help from a nonprofit credit counseling agency by visiting the National Foundation for Credit Counseling or calling (800) 388-2227.
Working with a credit counselor, you can set up a debt management plan. You make one lump payment monthly to the nonprofit agency, which then forwards payments to your creditors. By participating in this type of debt management program, you may benefit from reduced or waived finance charges or fees.
7. Consider bankruptcy as a last resort. I’ve helped a few seniors overwhelmed with credit card debt file for bankruptcy protection. For them, credit had become the bridge to extend their Social Security retirement benefit checks. It was how they made their meager ends meet. Bankruptcy gave them a fresh start.
Ask for recommendations for a bankruptcy attorney or use the Find An Attorney database for the National Association of Consumer Bankruptcy Attorneys.