Credit card interest rates are rising. Here’s how to manage your debt

Editor’s note: A version of this story was originally published on January 31, 2022.

Interest rates are going up this year on all kinds of consumer debt, and that’s bad news for those with a credit card balance.

The Federal Reserve pushed interest rates higher in an ongoing campaign to fight inflation, announcing three consecutive unprecedented jumps of 75 basis points. This has increased the cost of borrowing for many consumers.

Generally, credit card users can avoid paying interest on their purchases by paying their balance in full each month. But about half of all cards have an outstanding balance, according to LendingTree. For these borrowers, higher rates can be costly.

Over the past six months, the average annual percentage rate – the interest on a card expressed as an annual rate – has risen from 16.17% to 16.65%, approaching the all-time high of 17.14% in 2019 , according to the Federal Reserve.

Meanwhile, credit card debt has increased. Credit card balances rose 13% in the second quarter from a year earlier, the largest increase in more than 20 years, according to the Center for Microeconomic Data at the Federal Reserve Bank of New York.

The rise appears to have been driven by higher prices, said Center administrator Joelle Scally.

“While household balance sheets appear to be in good shape overall, we are seeing an increase in delinquencies among risky and low-income borrowers with rates approaching pre-pandemic levels,” she said.

While the impact of a single interest rate hike may seem relatively small on its own, the cumulative effect of this year’s five rate hikes from the Federal Reserve will cost the average consumer with a credit card balance. from about $5,200 about $156 more a year, or $13 a month, said Michele Raneri, vice president of US research and consulting at TransUnion.

For borrowers affected by inflation, budgeting and monitoring credit card spending should be part of their financial practice. But it’s especially important to keep some cash on hand, Raneri.

“Have an emergency fund handy,” she said. “Three to six months worth of expenses ideally, but even a few hundred extra dollars can prove invaluable.”

She said borrowers should also be careful to use credit diligently and knowing that as interest rates rise, so will minimum credit card payments.

“Use credit only to the extent that you are confident you can afford to make those payments and avoid defaults,” she said.

Another strategy is to go directly to the credit card companies.

You are your best advocate for getting out of a high APR, said 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 will work,” Schulz said. But research from LendingTree indicates that most of the time, people who ask for a lower interest rate get one. “It can be a reduction of 10 percentage points or more. It is an important thing.

But you don’t have to face financial hardship to potentially get a break on your APR. You also don’t need to have a credit score of 800.

“The fact that the success rate is so high suggests that people from all credit backgrounds are getting what they want,” he said. “It’s definitely 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’ve been a customer for a long time, but my interest rate is really high. I saw this card that gives me this rate, could you match it? Chances are they will listen to you and eventually work with you.

If you’re having difficulty, such as job loss or a medical condition, you can mention it to your card issuer, he said.

“Banks have hardship programs where they’ll cut interest rates, cut minimum payments, waive fees, to help you get through a short-term financial bump.”

If you can’t get your APR down and you’re still struggling with debt, a balance transfer card can be helpful, Schulz said.

“It may seem strange to get another card to help you, but a 0% interest rate on a balance transfer card can help you avoid accruing interest on that card for almost two years” , did he declare.

But it’s very important to understand the fees, what the rate will be after the low rate period ends, and if there are any delays with balance transfer cards.

You’ll need good credit to get one of those cards, Schulz said, probably 660 or more, though that varies by issuer. But if you can, they can save you a lot of money, and banks are willing 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 everywhere,” he said.