Credit card interest rates climbing. Here’s how to tackle your debt

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

Interest rates on all types of consumer debt are rising this year, and that’s bad news for those with credit card balances.

The Federal Reserve has pushed interest rates higher in an ongoing anti-inflation campaign, announcing three unprecedented 75 basis point jumps in a row. This has pushed up the cost of borrowing for many consumers.

Typically, credit card users can avoid paying interest on purchases by paying off their balance in full each month. However, according to LendingTree, about half of all cards have an outstanding balance. Higher interest rates can be expensive for these borrowers.

Over the past six months, the average APR — a card’s annual rate of interest — has risen from 16.17% to 16.65%, nearing an all-time high of 17.14% in 2019, according to the Federal Reserve.

Meanwhile, credit card debt has grown. Credit card balances rose 13% year over year in the second quarter, the largest increase in more than 20 years, according to the Federal Reserve Bank of New York’s Center for Microeconomic Data.

The increase appears to have been driven by higher prices, said Joelle Scally, the center’s administrator.

“While overall household balance sheets appear to be in a strong position, we are seeing rising defaults among subprime and low-income borrowers with interest rates approaching pre-pandemic levels,” she said.

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

For borrowers feeling the blow of inflation, budgeting and monitoring credit card spending should be part of their money practice. But it’s especially important to have some cash on hand, Raneri.

“Have an emergency fund ready,” she said. “Ideally, three to six months’ spending, but even a few hundred dollars more can prove valuable.”

She said borrowers should also be careful to use credit wisely and understand that as interest rates rise, so do minimum credit card payments.

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

Another strategy is to contact the credit card companies directly.

You’re your own 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’s going to work,” Schulz said. However, LendingTree’s research shows that, more often than not, people who ask for a lower interest rate get one. “It can be a reduction of 10 percentage points or more. This is a significant thing.”

But you don’t have to be in dire financial straits to potentially get a break in your APR. You also don’t have to have an 800 credit score.

“The fact that the success rate is so high suggests that people from across the credit spectrum are making headway,” he said. “It’s definitely worth calling.”

One way to increase your chances of getting a lower fare is to prepare yourself 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 map giving me this course, could you adjust it?’ There is a good chance they will listen and possibly work with you.”

If you have an emergency such as For example, if you have a job loss or a medical problem, you can tell your card issuer, he said.

“Banks have contingency programs where they lower interest rates, reduce minimum payments and waive fees to get you through a short-term financial hump.”

If you’re unable to lower your APR and are still struggling with debt, a balance transfer card can come in handy, 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 interest on that card for almost two years,” he said.

However, it is very important to understand the fees, what the interest rate will be after the low-interest period is over, and whether there are any deadlines for balance transfer cards.

You need good credit to get one of these cards, Schulz said, likely 660 or higher, though it will vary by issuer. But if you can, they can save you a lot of money, and banks are happy 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.