Why it’s important to pay off credit cards as interest rates rise – and how to do it

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In addition to rising prices at groceries and big-box retailers, Americans can expect to pay even more if they purchase goods and services with a credit card and carry a balance. Wall Street analysts at Goldman Sachs forecast that the US Federal Reserve will raise interest rates four times in 2022, once more than expected. Additionally, rate hikes could begin as early as March, creating economic uncertainty for many.

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For consumers, this means that the price of borrowing will increase. Credit cards have a variable rate, usually expressed as a percentage plus the prime interest rate. So when the prime rate goes up, your credit card interest rate goes up too.

If you’re only making the minimum monthly payment, which is usually about 2% of your balance, you might not even be paying interest each month. The Experian Credit Report indicates that Americans have an average of $5,525 in credit card debt and pay about 16% annual interest on that debt. Experts predict credit card interest rates could hit 17% by the end of the year, CNBC reported.

If you’re carrying the average amount of debt, that extra percentage point on your APR could add up to an extra $300 or $400 a year, CNBC said.

Rising credit card balances and inflation could lead to financial problems

After reducing their debt in 2020, thanks to federal stimulus funds and lower discretionary spending such as travel and entertainment, Americans’ credit card balances are starting to rise again. The Federal Reserve Bank of New York reported that credit card balances rose by $17 billion in the third quarter of 2021, after Americans paid off $83 billion in credit card debt the previous year.

Coupled with inflation, rising credit card debt and higher minimum monthly payments could cause some families to feel the fiscal squeeze. “Since rates are really going to go up, people’s credit card debt is only going to get more expensive,” Matt Schulz, chief credit analyst for LendingTree, told CNBC. “Now is the time to take some kind of action.”

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How to act on your debt

Fortunately, you have options for reducing credit card debt, especially if you have good or excellent credit. Consider looking for a 0% balance transfer offer, which can give you up to 18 months of time to pay off your debt. Read the fine print carefully before choosing your card. You’ll want to do the math to find out if the balance transfer fee is worth it. Try to find a card with 0% interest, no annual fee and no – or little – balance transfer fee.

You can also call the credit card companies and ask for a reduced interest rate. If you’ve been a good customer who pays on time, they might compel you, especially if you threaten to transfer your balance to a competitor.

Learn: Why Using the Same Credit Cards Over and Over Is a Bad Decision
Explore: 10 Ways to Bounce Back After a Month of Big Credit Card Spending

If you have equity in your home, consider getting a home equity loan or line of credit now, before mortgage rates rise even further. Currently, average home equity loan rates range from 3.25% to 7.94%, while home equity lines of credit (HELOC) range from 1.99% to 7.24%. Either rate is better than what you’d find with most credit cards. Additionally, consolidating high-interest debt into one monthly mortgage payment may be more efficient for some families than paying multiple credit card bills throughout the month.

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About the Author

Dawn Allcot is a full-time freelance writer and content marketer with interests in finance, e-commerce, technology, and real estate. His long list of publishing credits includes Bankrate, Lending Tree and Chase Bank. She is the founder and owner of GeekTravelGuide.net, a travel, technology and entertainment website. She lives in Long Island, New York, with a veritable menagerie that includes 2 cats, a rambunctious kitten and three lizards of different sizes and personalities – plus her two children and her husband. Find her on Twitter, @DawnAllcot.

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