Perspective | 7 ways to reduce your credit card debt after the Fed rate hike

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It’s the worst guilt one can carry in good times. It can be depressing when the economy is struggling with high inflation, a falling stock market and now rising interest rates.

Do you have credit card debt? Now it’s time to come up with a plan to pay off that debt as soon as possible because it’s going to get even more expensive.

In a bid to lower inflation, the Federal Reserve raised interest rates by three-quarters of a percentage point, the largest hike in nearly 30 years. One consequence of this move is that interest rates on credit card debt will rise.

What does the US Federal Reserve’s rate hike mean for consumers?

The average credit card rate is now over 20 percent, according to Matt Schulz, chief credit analyst at Lending Tree. “The worst news for cardholders when the Fed hikes rates is that they’re not just raising rates on things you buy in the future,” Schulz said. “The rate you pay on your current balance also increases, usually within a billing cycle or two.”

Maybe you’ve left your credit card debt lying around like a pet rock, gradually picking on it with minimum payments, or throwing some extra cash on the balance occasionally. Or maybe your financial situation has forced you to rely on loans to make ends meet. Whatever your situation, here are seven ways to reduce your credit card debt in light of this recent Fed rate hike and additional hikes likely to come soon.

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1. Stop charging your credit cards. Ever heard of the expression, “If you’re in a hole, stop digging?” You need to stop using your credit cards if you don’t pay off the balances every month. Also, keep in mind whatever you’ve calculated, whether it’s TV, dinner, a vacation, or clothes, it’s going to cost you more money in the long run if you keep rolling the debt.

The proportion of credit card revolvers, or those carrying a monthly balance, rose 0.6 percentage points nationwide to 40.1 percent in the fourth quarter of 2021, the American Bankers Association reported last month. The Fed has said it expects more rate hikes if it fails to tame inflation.

“What really matters is all of those rate hikes that add up to potentially several percentage point increases in credit card fees in a single year,” Schulz said. “The financial scope for mistakes with so many people is tiny anyway. The last thing they need when their grocery bills are going up and their gas prices are going up is for their credit card interest rates to go up.”

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2. Start paying out the smallest balance. The question I’m often asked about credit card debt is: should I pay off my credit cards with the highest interest rate first, or start with the one with the smallest balance?

On paper, the logical approach would be to go after the debt with the highest interest rate. But what works on paper doesn’t always work in practice. The debt reduction method I recommend is what I call the “debt stroke method.” The goal, like a 100-meter dash, is to run super fast on the debt.

In my experience, having helped hundreds of people pay off credit card debt, when they get a quick win, their motivation to get rid of the debt increases. The result is that they become more aggressive in attacking the outstanding balance and end up paying less interest charges than if they started with the card with the highest interest rate. Part of the struggle to reduce debt is sticking to a plan.

With the debt bar, you list all your debts, starting with the one with the lowest balance. Then use any extra money you can find to apply to the first card on your list while making minimum payments on all other debts. Once you discard that card, move on to the next one on your list, and so on. If two cards have similar balances, preference will be given to the one with the higher interest rate.

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3. Credit transferred to zero percent card. If you have good credit, you may qualify for an offer that transfers your balance to a zero percent interest rate card for a limited time. There are still plenty of offers for a zero-percent balance transfer, said Schulz. “We’re even seeing some select cards offering a full 24 months interest-free,” he said.

But as the Fed continues to hike rates and default rates get higher, those offers are likely to disappear, Schulz said. Instead of being able to find offers for 15 to 20 months with no interest, consumers might end up finding zero percent interest for nine months to 12 months, he said.

According to Ted Rossman, Senior Industry Analyst at Bankrate.com and CreditCards.com, these cards are generally available to people with a credit score of 670 or higher. “The average FICO score is 716, so most people should be able to qualify,” he said.

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4. Talk to your credit card issuer. Talking doesn’t come cheap when it comes to credit card debt. Many borrowers struggle under the weight of their Debt never asks for help, according to Bruce McClary, senior vice president of membership and communications at the National Foundation for Credit Counseling.

Before you call your creditor, check your credit report and credit history, McClary said. It helps to know how strong the negotiating position you have. “You want to make sure you know exactly what you’re going to say to the creditor to start the conversation about finding more affordable options,” he said. “Use good credit to your advantage.”

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When you first got your card, your credit history might not have been great, so you were offered a card with a high interest rate. But with on-time payments, you could now qualify for cheaper rates or even an interest-free credit card introductory rate, McClary said.

“That’s a big win because then you can plan to pay the balance while you have that interest-free repayment period,” he said. “But these offers go to people with the best credit ratings.”

5. Use debt consolidation or a personal loan. It makes sense to try to consolidate the debt and make a payment, especially if you can lower the interest rate. But don’t just focus on the monthly payment, McClary warns. “What you don’t want to do is tinker with the terms to get you this artificially low payment,” he said.

You may get a lower monthly payment, but you may be dragging out the loan for years, paying more interest over time than what your issuer charged.

6. Contact a nonprofit consumer credit counselor. If you’re not comfortable negotiating with your card issuer, get help from a nonprofit credit counseling agency by visiting the National Foundation for Credit Counseling or by calling 800-388-2227.

Working with a credit counselor, you can create a debt management plan. You pay a lump sum payment each month to the nonprofit organization, which then forwards the payments to your creditors. By participating in this type of debt management program, you can benefit from reduced or waived financing fees or charges.

7. Consider bankruptcy as a last resort. I’ve helped a few seniors overwhelmed with credit card debt file for bankruptcy protection. For them, the loan had become a bridge to extend their Social Security pension checks. That’s how they made ends meet on their skinny end. The bankruptcy gave them a fresh start.

Ask for bankruptcy attorney recommendations or use the Find An Attorney database for the National Association of Consumer Bankruptcy Attorneys.

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