Many Americans have outstanding credit card debt they're working to pay off. This type of high-interest debt can quickly become costly. If you carry a balance on your credit card, you'll continue to be charged interest. If you have credit card debt, you should know that your debt could get more expensive if credit card interest rates increase in the near future.
Credit card interest rates could increase
On May 3, 2023, the Federal Reserve hiked its federal funds rate for the 10th time since March 2022. The current Fed rate is now 5% to 5.25%. Changes to this rate can impact consumer interest rates. When the federal funds rate rises, banks tend to increase interest rates for products such as credit cards, savings accounts, and loans.
What does that mean for your credit cards? Most credit cards have variable interest rates, which means the interest rate can change periodically. If you use credit cards, your credit card interest rates may have recently increased, or they may increase soon due to the recent Fed rate hike. Higher interest rates mean more debt for those with a credit card balance. This news is worth knowing if you're working to pay off your credit card debt.
How to get rid of credit card debt
Outstanding credit card debt can keep you from reaching other personal finance goals. But if you work to pay off your debt sooner rather than later, you can put yourself in a better financial position and feel less stressed about money. It's understandable if your debt feels overwhelming, but it's possible to pay off your credit card debt. Here are some tips:
1. Be honest about your situation
If you're ready to tackle your debt, be honest about how much debt you have. There's no benefit in hiding from your situation, especially because credit card interest charges will continue to accrue even if you ignore your debt. You'll need to know how much debt you have to create a realistic debt payoff plan. You can use a debt payoff app to guide you.
2. Consider tackling the debt with the highest interest first
Some consumers follow the debt avalanche method when tackling costly credit card debt. With this strategy, you first focus on paying off the debt with the highest interest rate. As you do this, you'll want to continue paying at least the minimum amount due on your other credit cards. Eliminating high-interest debt first can save you money in the long run.
3. Avoid more debt with a balance transfer credit card
If you hope to pay off your credit card debt, you may want to consider using a balance transfer credit card. You can score a promotional 0% interest rate for a set period to avoid additional interest charges as you aggressively pay down your debt. Many balance transfer credit cards offer 0% APR for 18 months or more — which gives you time to tackle your debt.
While you'll pay a balance transfer fee, usually 3% to 5% of the transferred balance, a balance transfer credit card can save on interest charges so you can eliminate your debt faster. You can use this credit card interest calculator to determine how much you'll need to pay to eliminate your entire debt during the 0% interest period before interest starts to be charged.
Consider how interest rates impact your finances
No matter what financial product you utilize, don't ignore interest rates. A higher interest rate can be a win for your high-yield savings account balance, but high interest rates aren't ideal for those with credit card debt. If you don't have existing debt but use credit cards regularly, you can avoid interest by paying your entire balance off every month.
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