Interest rates: Now's the time to pay off credit card debt

Your credit card debt is about to get more expensive.

The Federal Reserve on Wednesday hiked a benchmark interest rate that credit cards track by three-quarters of a point, the largest increase since 1994. Within 30 to 45 days, the rate on credit cards will follow suit. And the central bank is not done hiking rates, signaling it plans to increase rates by another 1.75 percentage points over its four remaining meetings scheduled this year.

That means credit card debt is only going to get costlier as the year wears on at the same time Americans are ramping up balances, which ballooned almost 20% to $1.103 trillion in April.

“We're nowhere near the top of how high credit card rates will go,” Matt Schulz, chief credit analyst for LendingTree, told Yahoo Money. "This one rate hike is likely not going to be too concerning for most credit cardholders. The problem is that there have already been two rate hikes and there are almost certainly several more coming, and all of those likely will add up to a big deal.”

“That’s why it is so important for people to take action to knock down card debt as soon as possible,” he said.

Get a 0% interest rate

According to LendingTree’s monthly review of nearly 200 card offers on more than 50 card issuers, including banks and credit unions, the average APR was 20.17%. The average range of rates shown with a card was 16.53% to 23.79%, and nearly half of the cards tracked saw their APRs rise within the past month.

“The average APR on a new credit card offer topped 20% this month,” Schulz said. “That’s the first time it has reached that number since we began tracking in 2018 – and perhaps ever.”

This is what it means dollarwise. If you have $5,000 in credit debt and pay about $250 a month on it, every percentage point added to your card’s APR adds $60 to $80 in interest over the life of the balance, depending on your card’s current APR.

Fortunately, there’s a way to get a 0% interest rate — even now — to tackle the debt before the Fed hikes again.

One good tool for those struggling to pay off debt is opting for a 0% balance transfer credit card, according to Schulz. These cards are widely available and many allow you to avoid paying interest on the transferred balances for up to 21 months – but they won’t be a safety net for much longer.

“The availability of these balance transfer offers is great news for consumers because it gives them a very powerful weapon against rising interest rates,” Schulz said. “However, if the Fed keeps raising rates at the pace many expect, these offers won't be as strong forever. We haven't seen issuers shortening introductory periods or increasing balance transfer fees en masse yet, but as overall rates go higher and higher, that is a distinct possibility in the next year or so.”

While 0% balance transfer cards may look attractive for those carrying high-interest debt, you must be disciplined in paying it off — or else you could end up compounding your debt problem.

“Balance transfers and introductory rates may help, but they can also get people into more trouble,” Rod Griffin, senior director of public education advocacy for Experian, told Yahoo Money. “I’m an example of that. When I was younger, I did a balance transfer from one account to max it out on an account with zero balance and low interest. Then, I had two accounts and maxed them both out.”

According to Griffin, before you opt for a balance transfer it’s critical that you understand the terms and conditions of your credit card. Most credit card issuers will impose a credit limit on the amount you can transfer and if you surpass that limit, it could negatively affect your credit score.

You could also be at greater risk to take on more debt and not be able to pay it off within your introductory timeframe, which could result in a higher interest rate than your original account.

Still, if you can at least minimize one high-balance credit card and you can be responsible for managing your debt, a 0% balance transfer could be a relief on your wallet.

“You want to get the balance paid off completely before the promotional rate expires,” Greg McBride, chief financial analyst for Bankrate, told Yahoo Money. “Waiting will only cost more as you’ll be incurring higher rates on your existing debt and the balance transfer offers will get less generous as interest rates rise.”

Ask for a lower interest rate

Another option that many credit card holders don’t think about is picking up the phone and asking their credit card issuer for a lower interest rate. Though the chances of getting a lower APR rate are at the lowest they’ve been in four years, it’s still incredibly likely that it will happen if you request it.

In 2022, 70% of cardholders who requested a lower APR rate got their way, down from 83% in 2021, according to a LendingTree report.

Still, “far too few people asked," Schulz said. “You don’t have to have perfect credit to get your way, so it’s definitely worth asking especially if you do have good credit."

Let your credit report be your guide

If you’re not sure where to get started as you manage your credit card debt, start by checking out your credit report.

“Take a look at your credit report, see the accounts you have and where your balances are,” Griffin said. “You need to know where you stand before you can do something about it.”

For example, Experian offers a free tool where you can view your credit score and keep track of your monthly credit report. According to Griffin, this can help credit card holders easily keep track of their spending and manage their debts.

No matter how you plan to tackle the debt, sooner is better than later, experts said.

"Now is absolutely the time to deal with credit card debt,” Schulz said. “With the Fed raising rates today and almost certainly continuing to do so in the very near future, that credit card debt is only going to get more and more expensive if you don’t take action."

Gabriella is a personal finance reporter at Yahoo Money. Follow her on Twitter @__gabriellacruz.

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