As the central banks around, especially the ECB and the Fed, the world are increasing the interest rate, it’s becoming more expensive to pay down credit card debt. The United States Federal Reserve in particular has raised interest rates for the seventh time in 2022 alone, in an effort to combat inflation and is expected to continue increasing rates in 2023. As the result, the average interest rate on new credit card offers is nearly 23 percent in 2023. Credit card interest rates are as high as they’ve ever been and, unfortunately, isn’t likely to be much better soon.
Since most credit cards have a variable interest rate, there’s direct connection between the central banks’ rate hikes and the interest rate you’re charged on your credit card. Therefore, a higher interest rate means that your credit card debt will cost more to pay off.
Namely, a 5,000 USD balance on a credit card with a 19 percent annual percentage rate (APR). If you make a repayment plan of 200 USD a month for 2 years, for instance, you will pay about 1,415 USD in interest, in addition to the principal balance of 5,000 USD.
Let’s say you have that same amount of 5,000 USD but with a 22 percent APR. It would cost you around 1,750 USD in interest.
Although you can avoid interest charges altogether by paying your statement balance in full every month, it can be puzzling sometime. If you’re feeling under stress by credit card debt, the following are three steps you can approach, to ease the financial stress:
1. Create A Budget
Without a budget, you can’t have a meaningful plan to tackle credit card debt and it is complex if you don’t know how much money is coming in and going out of your household each month. By knowing how much is your income and how much you’re spending, you can figure out how much to allocate toward paying off credit card debt and meeting other financial goals.
If you already have a budget, be sure to continually update it to reflect rising costs driven by inflation. Sometime, all the assumptions you made few months ago about what things would cost have all been blown out of the water by inflation.
2. The Option Of Transfer Card
Balance transfer cards offer an introductory zero percent APR period that can last to two years. By transferring a high balance to one of these types of cards, you’re able to pay down your debt without incurring costly interest charges for a period of time.
Although, the balance transfer credit cards are absolutely one of the best weapons against credit card debt, however, you typically need a credit score of more than 670 to be qualify for a balance transfer card. Even though having a good credit score doesn’t guarantee that you’ll qualify, the likelihood that you’ll be approved generally decreases if your credit score is below threshold.
It’s also important to note that card issuers typically limit the amount of debt you can transfer to a new card. That means you may only be approved to transfer part of your debt.
If you was lucky to be get approved, be sure to review the balance transfer fee, which can be more than 3 percent of the amount you’ve transferred. Also, watch out for payment deadlines to avoid late charges.
3. The Lower Rate
One of the biggest misconceptions about credit card interest rates is that you have no control over it, but you actually have more power than you think. In fact, about 70 percent of people who asked for a lower interest rate on their credit card in the past got one.
With such a high success rate, you probably don’t need a perfect credit score or a long track record with the bank to lower your credit card interest rate. There are no guarantees, of course, but as the old saying goes, if you never ask, the answer is always no.