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How to pay off credit card debt with a 20% interest rate

Rising interest rates have pushed annual percentage rates on credit cards to new highs.

According to LendingTree’s Tracker, the average annual percentage rate on a new credit card is now over 20%. This is the first time that rates have risen to 20% since the launch of Tracker in 2018.

“When you factor in the cost of everything on a day-to-day basis, consumers need credit card rates to finally reach new highs, but that’s where we are,” said Matt Schulz, chief credit analyst at LendingTree. .

And rates go even higher across the board.

In June, the Federal Reserve hiked its benchmark interest rate by 0.75 percentage points, the largest increase in 28 years and signaled that it would continue to raise year-over-year rates to curb inflation.

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According to Schulz, the rates consumers pay on credit card debt closely follow the Fed’s actions.

“The chances of rates going up are nowhere near what we are,” he said.

That could pose a problem for Americans with pending bills.

Credit card balances reached $ 841 billion in the first three months of the year, according to a report by the Federal Reserve Bank of New York. In the same period, 229 million people opened new credit card accounts, up from the previous quarter.

Look for lower rates to pay off debt

To avoid paying too much in that balance as interest rates rise, it’s a good idea to try to deal with outstanding credit card debt if you have it.

“The big key to getting out of credit card debt is not paying high interest rates on that loan,” said personal finance expert Suzy Orman.

One of the first steps Orman can advise those who want to get away with credit card debt is to see if you can lower your interest rates.

Doing this will help you pay off your debt quickly and make sure that most of your money is going to knock out what you owe instead of collecting interest.

There are some ways to do this, such as transferring a balance to another credit card with 0% interest rates for a specified period, taking out a personal loan with a lower interest rate to pay off your credit balance, or working with a credit counselor to consolidate your debt at a lower rate.

These options depend on your personal situation and your credit score, Orman said.

For those with low scores, they recommend reaching out to the National Foundation for Credit Counseling to help you lower your interest rate and get a payment plan.

Choose a refund method

According to John Scherer, a certified financial planner and founder of Trinity Financial Planning in Madison, Wisconsin, people usually use two methods to clear the balance if you pay off your debt while opening your cards.

Getting started with paying off all your outstanding debts and paying small ones through one balance.

“Then you get momentum,” Scherer said. “You see some of those things fall out of books, and it’s really good.”

The second model that Sherer personally recommends to customers is to look at all your outstanding debt and pay the highest interest rate first. Over time, this means you will pay less to knock out your debt because you will soon be dealing with higher interest rates.

Orman also recommends this method.

They say complete your credit card debt and add up all the minimum payments due each month. From there, add 20% or more to your total payment and apply it to a loan with a higher interest rate. After paying it, roll that extra payment to the next card, and then the next until everything is erased.

Increase savings

In addition to paying off your debt, make sure you set aside some money to build emergency reserves, Scherer said. This will prevent you from accumulating more debt while you work to pay off your existing balance.

“You pay for it, but then the transmission blows or the refrigerator takes a dump on you and now you’re back for another thousand bucks on a credit card,” he said.

If you want to keep your credit cards open so you don’t confuse your credit score but don’t use them too much, Orman suggests hiding them from you.

“All you have to do is take all your credit cards, put them in a plastic bag and put them in the freezer,” he said. “Don’t excite yourself.”

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Disclosure: NBCUniversal and Comcast Ventures are investors Acorns.

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