It’s an especially expensive time for people with credit card debt, and the pain will likely only worsen with another expected interest rate hike coming from the Federal Reserve this week.
Interest charges on credit cards tend to move with the Fed’s benchmark rate. The current national average rate on plastic is already more than 20%, which is the highest it has been in decades.
“Many people we speak with are feeling squeezed,” said LaDonna Cook, a manager art GreenPath Financial Wellness, a national non-profit debt counselor.
Here’s what consumers need to know about the rising rates on their cards — and what they can do about it.
Your interest rate could increase within a month
In an effort to combat inflation. the Federal Reserve has already raised its rate nine times over the past year or so, explaining why interest rates on credit cards are this high.
“Rates jumped more in 2022 than any other year on record,” said Ted Rossman, senior industry analyst at Bankrate. He added that “rates will probably go slightly higher from here.”
If there’s another hike this week from the central bank, consumers can expect to see their credit card rate inch up “within a month or two,” Rossman said.
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It’s more important than ever to be aware of the interest you’re paying. Some card issuers are charging “eye-popping” rates, Rossman said. For example, First Premier Bank charges annual percentage rates as high as 36%.
Your credit card statement should list your interest rate, and you can also find it online by logging into your account, Rossman said.
The rate doesn’t really matter, he said, if you pay off your credit card balance every month.
However, if you don’t do that, “interest costs can be steep and accumulate quickly,” Rossman said.
There are ways to pay less interest
For those struggling with credit card debt, Rossman said he recommends first looking to see if you qualify for a so-called 0% balance transfer card.
These cards allow you to move your existing debt on to a new card, with an introductory period in which you don’t pay any interest (although there’s usually a fee to do the transfer).
“You can avoid interest for up to 21 months,” Rossman said.
Another option is taking out a personal loan and using the funds to pay off your credit card debt. You’ll have a new monthly payment from the loan, but if your credit is good, the interest rate may be as low as 7%, Rossman said.
For those with a lower credit score and a lot of debt, a reputable non-profit credit counseling agency, like Money Management International, can match you with debt management plans with rates as low as 7%, Rossman said.
GreenPath manager Cook said you can also try asking your credit card issuer if it will lower your interest rate.
“If your credit is less than optimal, consider building [it] up before making the request,” Cook said.
Paying a little more each month can go a long way
Lastly, paying just a little more than the minimum payment on your credit card each month can save you a lot of time and interest, Rossman said.
He provided an example: If someone paid only the smallest possible payment each month toward their credit card balance of $5,805 (the national average), they’d be in debt for more than 17 years and in excess of $8,300 in interest, assuming they were getting dinged the average current interest rate of more than 20%.
If they paid just an extra $50 a month, however, their timeline would drop to six years and they’d save $5,000 in interest.