Interest rates have risen this year for all types of consumer debt, and that’s bad news for those carrying a balance on their credit card.
The Federal Reserve (Fed) raised interest rates in an attempt to combat inflation, announcing three consecutive jumps of 75 basis points, which is unprecedented. That has raised the cost of borrowing for many consumers.
Generally, credit card users can avoid interest by paying their balance in full each month. But about half of the cards currently have outstanding balances, according to LendingTree. For the owners of those cards, the higher rates will be felt in higher costs.
Over the past six months, the average annual percentage rate (the interest on a card expressed as an annual rate) increased from 16.17% to 16.65%, nearing the all-time high of 17.14% in 2019, according to the Federal Reserve.
Meanwhile, credit card debt grew. Credit card balances grew 13% in the second quarter from a year earlier, the biggest increase in more than 20 years, according to the Federal Reserve Bank of New York’s Microeconomic Data Center.
The increase appears to have been driven by higher prices, said Joelle Scally, the Center’s administrator.
“While household balance sheets appear to be in strong position, we are seeing delinquencies rising among low-income and high-risk borrowers with rates approaching pre-pandemic levels,” he said.
Build an emergency fund and use cards sparingly
While the impact of the interest rate hike may seem relatively small on its own, the cumulative effect of the Federal Reserve’s five rate hikes this year will cost the average consumer with a credit card balance. of about $5,200, about $156 more per year, or $13 more per month, said Michele Raneri, vice president of US research and consulting at TransUnion.
For those feeling the pinch of inflation, budgeting and monitoring credit card spending should be part of their money practices. But it’s especially important to have some cash on hand, Raneri says.
“Have an emergency fund ready,” he said. “Ideally three to six months of expenses, but even a few hundred extra dollars can prove valuable.”
She explained that people should be careful when using credit cards and do so knowing that as interest rates rise, so do the minimum payments on the credit card.
“Only use credit to the extent that you are sure you can make those payments and avoid delinquency,” he said.
Ask for a lower rate
Another strategy is to appeal directly to the companies behind the credit cards.
You are your own best advocate for getting out of a high APR, says Matt Schulz, chief credit analyst at LendingTree. And you can start by calling your card issuer and asking for a lower interest rate, he said.
“People don’t think it works,” Schulz said. But LendingTree’s research indicates that more often than not, people who ask for a lower interest rate get it. “It can be a reduction of 10 percentage points or more. It’s something significant.”
But you don’t have to face financial hardship to get a potential reduction in your APR. You also do not need to have a credit score of 800.
“The fact that the success rate is so high suggests that people across the credit spectrum are getting away with it,” he said. “It’s worth making the call.”
One way to increase your chances of getting a lower rate is to come prepared with information about other card offers you’ve seen available, he said.
“You can say, ‘I’m a long-time customer, but my interest rate is really high. I saw this card that gives me this rate, could you match it?’ There’s a good chance they’ll listen to you and possibly work with you.”
If you’re having a hardship like job loss or a medical problem, you can mention it to your card issuer, he said.
“Banks have hardship programs that lower interest rates, lower minimum payments, waive fees, among other measures to help you get over a short-term financial hump.”
Transfer your balance
If you can’t lower your APR and you’re still struggling with debt, a balance transfer card can help, Schulz said.
“It may sound strange to get another card to help you, but a 0% interest rate on a balance transfer card can help you avoid accumulating interest on that card for almost two years,” he said.
But it’s very important to understand the fees, what the rate will be after the low-rate period ends, and whether there are deadlines with balance transfer cards, he added.
You’ll need good credit to get one of these cards, Schulz said, probably 660 or higher, though it will vary by issuer. But if you can, they can save you a lot of money, and banks are eager to lend if you have decent credit.
“Even though credit card rates have gone up like crazy this year, 0% balance transfer cards are still ubiquitous,” he said.
