How to pay down your credit card debt as interest rates jump

Sometimes a life raft can be very similar to a credit card.

In an economy that has produced the highest rate of inflation since the early 1980s, Americans are struggling to keep up with daily spending and are increasingly relying on credit cards to stay afloat.

Amid a dramatic rise in the cost of living, credit card balances rose 13% in the second quarter of 2022, posting the largest year-on-year increase in more than 20 years, according to a report by the Federal Reserve Bank of New York.

Total credit card debt is back at $890 billion, just below 2019’s record high.

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“Many have to rely on credit cards to pay for basic needs, especially with inflation driving prices so high,” said Allen Amadin, president and CEO of American Consumer Credit Counseling.

The number of people using credit cards and personal loans also hit record highs in the second quarter, according to TransUnion’s latest Credit Industry Insights report.

Meanwhile, the Federal Reserve is taking aggressive steps to tame inflation, including raising interest rates, raising the cost of borrowing to curb spending, but that means it will soon cost even more to keep a balance on a monthly basis lead than is the case now.

Since most credit cards have a variable interest rate, there is a direct link to the Fed’s benchmark. When the federal funds rate rises, so does the federal funds rate, and credit card rates follow suit. Cardholders typically see the impact within a billing cycle or two.

Average credit card rates are currently just over 17%, well above almost any other consumer loan, and could climb as high as 19% by the end of the year — which would be an all-time high.

“Reducing credit card debt is always critical to financial health,” Amadin said. “However, for Americans today, more than ever, it is crucial to be able to survive the daily expenses of living and still be able to set aside money to save.”

Here are his top three tips for paying off credit card debt once and for all.

1. Create budget: For starters, using a spreadsheet or online tool can help you see where you’re spending money and how to better allocate those funds. This will also help you identify the regular expenses that could pull money away from your long-term goals.
2. Cut expenses: If you’re trying to reduce debt, make sure you temporarily cut out any unnecessary expenses like streaming subscriptions, dining out, or impulse buying. By cutting those expenses, you can stay on budget, stop increasing your revolving balance, and pay off more debt.
3. Pay more than the minimum: Paying off your credit cards on time will help you avoid late fees and penalties. But don’t just pay the minimum required – it won’t do much to avoid high interest charges on the balance. Only by paying more than the minimum will you reduce the interest you have to pay each month and help you reach your goal.