Interest rates are expected to rise again, making this a good time to pay off high-cost credit card debt as soon as possible.
Annual percentage rates on credit cards are currently just over 16%. Given that the Federal Reserve is in a rate-hike cycle, with half-point increases on the table for every remaining meeting this year, APRs are likely to rise.
They could even exceed the current record of 17.87% set in April 2019.
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This could pose a problem for Americans with unpaid bills. Credit card balances hit $841 billion in the first three months of the year, according to a report from the Federal Reserve Bank of New York. During the same period, 229 million people opened new credit card accounts, an increase from the previous quarter.
“The biggest key to getting out of credit card debt is not paying high interest on that debt,” said personal finance expert Suze Orman.
Look for lower interest rates
One of the first steps Orman advises anyone looking to reduce their credit card debt is to see if you can lower your interest rates.
This will help you pay off your debt faster and ensure that more of your money goes to eliminating what you owe, instead of accumulating interest.
There are several ways to do this, such as a balance transfer to another credit card with 0% interest rate for a certain 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 debts with a lower rate.
These options will depend on your personal situation and credit score, Orman said. For those with lower scores, she recommends contacting the National Foundation for Credit Counseling for help lowering your interest rate and getting a payment plan.
Choose a method
According to John Scherer, a certified financial planner and founder of Trinity Financial Planning in Madison, Wisconsin, if you’re going to pay off debt while keeping your cards open, there are generally two methods people use to clear a balance.
The first is to round up all your outstanding debts by balance and pay off the smallest first.
“Then you get momentum,” Scherer said. “You see some of these things falling off the books, and it feels really good.”
The second model, which Scherer says is what he personally recommends to clients, is to look at all your outstanding debts and pay off the one with the highest interest rate first. Over time, this means you’ll pay less money to eliminate your debt because you’re tackling the highest interest rates right away.
Orman also recommends this approach. It says to round up your credit card debt and add up all minimum payments due each month. From there, add 20% or more to your total payment and apply it to the debt with the highest interest rate. Once that’s paid, transfer that extra payment to the next card, then to the next until it’s all cleared.