For Americans who’ve tapped credit cards to combat the escalating cost of everyday goods or who ramped up debt to quell pent-up yearning for travel and leisure activities, the Federal Reserve’s move this week may have grave consequences.
The central bank again pumped up its benchmark interest rate another three-quarters of a point with more hikes likely to come. That means credit card interest rates, which move in tandem with Fed increases, will follow suit in 30 to 45 days.
That’s grim, especially because the average variable credit card rate is now 18.16%, the highest in 27 years, according Bankrate.com, and will likely go higher.
“In the next few months, there’s a very good chance that the average rate will surpass the all-time record of 19% from July 1991,” Ted Rossman, senior industry analyst at Bankrate.com, told Yahoo Money. “Today’s hike means that most credit cardholders will soon face rates that are three full percentage points higher than they were at the start of the year.”
Here’s where it gets even uglier. It’s not all new debt piled up this year — 60% of credit card debtors say they have owed their creditors for at least a year, up from 50% in 2021, according to a new CreditCards.com report released this week.
A hefty 40% of the 2,419 adults surveyed said they’ve been carrying their credit card debt month to month for at least two years, up from 32% last year; 28% have carried a balance for at least three years and 19% for at least five years. Another 8% said they didn’t have a clue about how long they’ve done so.
Credit card debt is most widespread among cardholders (59%) with under $50,000 in annual household income, according to the report. For cardholders in middle-income households, nearly half of those earning $50,000 to $79,999 annually (49%) and $80,000 to $99,999 annually (46%) roll over credit card debt from month to month. More than one-third (37%) of cardholders with annual household incomes of $100,000 or more also don’t pay their bills in full each month.
“Because credit cards charge rates that are often three, four or five times higher than other products such as mortgages, car loans and student loans, paying off credit card debt should definitely be a top priority,” Rossman said.
And he’s right. Ignore it at your peril. Anything that's not paid off is about to get more expensive for the foreseeable future.
“My top tip for anyone dealing with credit card debt is to sign up for a 0% balance transfer card,” Rossman said. “These allow you to pause the interest clock for up to 21 months, which can be a tremendous tailwind for getting out of debt relatively quickly at a low cost. There’s a 3-5% transfer fee, but that long interest-free period is well worth it.”
Alternatives might include a low-rate personal loan, perhaps as low as about 6% over five years if you have strong credit, he said.
Create a realistic payment plan to chip away at your balance.
“The key to paying off credit card debt is to establish a payment plan that works for your budget and to stick to it,” Kelly LaVigne, vice president of consumer insights at Allianz Life, told Yahoo Money.
Automating your monthly payments from your checking account for recurring bills and paying more than the minimum can help keep you on track.
If you need more help, a nonprofit credit counselor may be able to negotiate for lower rates from your credit card issuers, but you will pay a fee for the service. The Justice Department website provides a list of approved credit counseling agencies.
Finally, slam the brakes on non-essential spending. According to the Retirement Risk Readiness Study from Allianz Life, more than half of “non-retired Americans (54%) said they were spending too much money on non-necessities over the past two years.
“Many people with credit card debt got into trouble because they were spending regardless of costs,” LaVigne said, “or their ability to afford new purchases”
Kerry is a Senior Columnist and Senior Reporter at Yahoo Money. Follow her on Twitter @kerryhannon