3 tips for paying down your credit card balances as interest rates jump, according to a debt counselor
- Americans are struggling to keep up with a higher cost of living and increasingly relying on credit cards.
- At the same time, the Federal Reserve is hiking interest rates, which raises the cost of borrowing.
- Here are three steps to reduce credit card debt.
Sometimes a life raft can look a lot like a credit card.
In an economy that has produced the highest inflation rate since the early 1980s, Americans are struggling to keep up with day-to-day expenses and are increasingly relying on credit cards to stay afloat.
Amid a dramatic rise in the cost of living, credit card balances jumped 13% in the second quarter of 2022, notching the largest year-over-year increase in more than 20 years, according to a report from the Federal Reserve Bank of New York.
Total credit card debt is back to $890 billion, just shy of 2019's record high.
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"Many have to rely on credit cards to pay for basic necessities, especially with inflation pushing prices so high," said Allen Amadin, president and CEO of American Consumer Credit Counseling.
The number of people with credit cards and personal loans also hit record highs in the second quarter, TransUnion's latest credit industry insights report found.
Credit card interest rates are nearing record highs
Meanwhile, the Federal Reserve is taking aggressive steps to tame inflation, including hiking interest rates, which raises the cost of borrowing money in order to slow spending, but that means that carrying a balance month to month will soon cost even more than it does now.
Since most credit cards have a variable rate, there's a direct connection to the Fed's benchmark. As the federal funds rate rises, the prime rate does, as well, and credit card rates follow suit. Cardholders usually see the impact within a billing cycle or two.
Average credit card rates are currently just over 17%, significantly higher than nearly every other consumer loan, and they may go as high as 19% by the end of the year — which would be an all-time high.
Now more than ever it is critical for Americans to survive day-to-day costs of living.Allen Amadinpresident and CEO of American Consumer Credit Counseling
Reducing balances is 'crucial to financial health'
"Reducing credit card debt is always crucial to financial health," Amadin said. "However, now more than ever it is critical for Americans to survive day-to-day costs of living and still be able to put money aside for savings."
Here are his three best tips to paying down credit card debt, once and for all.
- Create a budget: For starters, using a worksheet or online tool can help you see where you are spending money and how to better disperse those funds. That will also help you identify the regular expenses that could be siphoning money away from your long-term goals.
- Cut spending: When trying to reduce debt, make sure to temporarily remove all unnecessary expenses, such as streaming subscriptions, dining out or impulse purchases. Cutting back on those expenses will help you stick to the budget, stop adding to your revolving balance and pay down more debt.
- Pay more than the minimum: Paying your credit cards on time will ensure you avoid late fees and penalties. But don't just pay the minimum required — that won't do much to avoid hefty interest charges on the balance. Only paying more than the minimum will reduce the amount of interest you have to pay each month and help you reach your goal.