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Here’s why you should start paying off debt now — and how to get started

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Some of your debt is about to get more expensive

On Wednesday, the Federal Reserve raised its benchmark interest rate by a quarter percentage point. That, in turn, likely will impact the rates charged on your credit cards.

The average rate is just over 16% right now, according to Bankrate.

The increase isn't going to rock too many people's worlds financially, said Matt Schulz, chief credit analyst at LendingTree.

"The big danger comes from this happening several more times over the next few months and potentially in bigger chunks," he said.

The central bank forecast six more hikes in 2022, which could mean a rate of 1.9% by year's end. The Fed sees three more hikes in 2023.

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The Fed began increasing rates in an effort to combat inflation, which is at its highest level in more than 40 years. As prices rise on everything from groceries to cars, many are turning to credit cards for some relief.

During the Covid-19 pandemic, 30% of U.S. adults increased their credit card debt, LendingTree found. Of those, 48% cited inflation and 34% named income loss as the top drivers of debt. The online survey of 1,249 consumers, conducted by Qualtrics, was conducted from Feb. 7 to 10.

Whether it is credit card bills or another type of debt, like personal loans or medical bills, it's good to have a plan in place to pay them down.

Understand where you stand

If you aren't budgeting, start now, said Jim Wang, founder of personal finance blog Wallet Hacks.

Identify where you are spending money and see if it is in line with your goals, he said. You can also review where there may be wasteful spending, where you can cut back and by how much, he said.

"Budgeting isn't about cutting down to the lowest spending possible — that's both unrealistic and unsustainable over the long run," Wang said.

"You want to find areas where you can trim a little to help you find money you can put towards your debts."

You also need to get a picture of your debt situation. Make a list of what you owe, whom you owe it to, your minimum payments and interest rates, suggests Nicole Victoria, a money coach and TikTok creator known as No Budget Babe.

The list should go from the highest to lowest interest rate.

How to start

Once you have your list of debts, come up with a plan for repayment. Wang and Victoria like to pay off the highest-interest debt first, known as the avalanche method.

Another option is to start with the lowest balance first, to get the psychological reward of paying off a loan or credit card.

"Mathematically, the avalanche method has you saving more money and paying off more debt in a shorter time frame," Victoria said.

"However, at the end of the day the goal is to pay off your debt, so if you feel better with the other method, that is fine."

Consider transferring debt

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If you have good credit, consider transferring your high-interest debt to a zero-balance credit card. Many are offering up to about 21 months interest-free, LendingTree's Schulz said.

Just be sure to pay off the balance and not add more to it. Also understand any fees, deadlines and other fine-print details before you sign up. For instance, there is often a one-time fee for each balance transfer, around 3% to 5% of the balance.

Another option is transferring high-interest debt to a low-interest personal loan.

Negotiate

Not many people ask their credit card company to lower their rate, yet it often works. A pre-pandemic survey by LendingTree in 2019 found that 80% of those who asked for a lower interest rate were successful.

The best way to approach your lender is armed with other offers you have seen, so that you can play one credit card issuer off another, Schulz advised.

"It is such a competitive marketplace today that there is a really good chance, especially if you have decent credit, that they will work with you to some degree," he said.

You can also try to negotiate your bills, everything from rent — depending on where you live — to your cable, phone and car insurance, Victoria said.

Along the same lines, if feasible, consider asking for a raise at work. Taking on side work can also help expand your income, as can selling any items you may have sitting around the house.

Don't accumulate more debt

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Delete your credit card information off of your apps and computer, Victoria suggests. Then, put your card on ice — literally. Store it in a bag filled with ice and put it in the freezer, she said.

"You have to wait for the ice to melt to get the credit card information," Victoria said.

"It helps prevent you from self-sabotage and puts some time between you and the decision to buy."

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