How to Pay Off Credit Card Debt in the Face of High Inflation and High Rates
While many consumers are struggling to make ends meet and cover the rising costs of groceries, gas, and just about everything else, about three in five U.S. consumers admit they live off a check. payroll to payroll, according to a new survey. And more than a quarter say they have spent more than they have earned in the past six months.
Some consumers may turn to credit cards to help pay for their expenses. Still, many who live paycheck to paycheck struggle to make timely payments and have above-average card balances, the survey found.
So how can you better manage your credit and credit cards during a time of financial stress? Here are three tips to get you started:
1. Lower your credit card interest rate.
The Federal Reserve tries to control inflation by raising interest rates to help dampen demand. Yet it makes the cost of borrowing on everything from car loans to credit cards much more expensive. The average annual percentage rate (APR) on a new credit card is now over 20%, according to Lending Tree.
Try to pay little or no interest on your cards. Switch to a balance transfer credit card at 0% interest. Transfer your existing card balances from one or more high-interest credit cards to an interest-free card, at least for a while. Many of these cards have 0% introductory offers that last 12 to 15 months, with some lasting up to 24 months.
Or ask your card issuer to lower the interest rate. “Far too few people do, but 70% of those who applied in the past year got at least one discount,” said Matt Schulz, chief credit analyst at LendingTree. “The average decline was 7 percentage points, which is significant.”
2. Use autopay and alerts to manage balances and avoid late payments.
The average credit card balance was $5,219 in May 2022, an increase of about $500 in 12 months, according to a report by VantageScore. As account balances have increased, delinquencies on credit cards — payments 30 to 90 days late — have also increased since the spring of 2021, according to the study.
“Consumer delinquencies are on the rise again,” said Credit Karma CEO Kenneth Lin. “They’ve nearly doubled since the lows of the pandemic – and that’s troubling.”
To make sure you pay your credit card bills on time, set up automatic payments so that at least the minimum amount due (or better yet, a little more money) is taken from your bank account and sent directly to the customer. card issuer each month. . Then create calendar reminders and alerts on your phone or laptop — or use an actual calendar — to mark the dates when payment will be made as well as when payment is due. Check on both dates that the transaction and the payment have been made. You want to avoid late fees, which will cost you up to $30 the first time you’re late and $41 for subsequent incidents. And, if you can, try to pay off the balance in full each month to avoid accruing interest.
3. Don’t rely on personal loans or “buy now, pay later” products to improve your credit
Some consumers may choose to consolidate their credit card debt with a personal loan. The interest rate on a personal loan may be lower than your current credit card rate, depending on your credit score. Generally, the higher your score, the lower the rate. Personal loan rates currently range from 3% to 36%, according to Bankrate.
However, personal loan rates are variable and will increase as the Fed raises interest rates. Making regular, on-time payments on your personal loan can be a positive contribution to your credit history. Yet some credit experts worry that once consumers transfer balances to a personal loan, some will start racking up debt on their cards again. You may want to hide these cards.
Meanwhile, as buy now, pay later (BNPL) products become more popular, an Experian study found that four out of five consumers said they use BNPL to avoid credit card debt. With BNPL, the ability to purchase items with what are essentially short-term loans, pay a deposit, and then pay in three further installments over six weeks can be appealing.
However, BNPL products generally do not report your payment information to the major credit bureaus (Equifax, Experian and TransUnion). However, they can flag when you miss a payment and become delinquent. So, you don’t get a credit boost from a positive payment history, and negative information could appear on your credit report and hurt your credit score.