5 ways to cut your card debt as interest rates rise

Balance transfer or low-interest cards can buy you time to pay off your bills

Beth Braverman
Personal Finance Writer
Covers cool and trendy credit card stories

5 ways to cut debt as card interest rates rise

In general, a strengthening economy is good news, but if you have credit card debt, there’s a downside. The slowly improving economy has spurred the Federal Reserve to raise interest rates, and, as a result, credit card interest rates continue to climb. 

What’s a credit card holder who carries a balance to do? In short, focus now on paring your debt to cut your losses as card APRs increase.

How we got here
The Federal Reserve sets the federal funds rate, which is the rate that banks can charge to each other. Banks pass along any increase in that rate to consumers via higher interest rates. That means that borrowers with variable rate loans, such as those typically found on credit cards, likely will see their card APRs rise in the weeks after a Fed rate hike.

The immediate hit to your payment won’t be too bad – a quarter-point increase amounts to just $2.50 more in interest payments per year on every $1,000 owed. 

“The initial impact may be small, but it can end up being death by 1,000 cuts,” says Bruce McClary, a spokesman for the National Foundation for Credit Counseling (NFCC).

A 2017 survey by the NFCC found that 39 percent of American adults carry credit card debt from month to month, up from 35 percent in 2016, with 20 percent saying that they roll over at least $2,500 per month.

More rate hikes, bigger impact
A July 2017 update to TransUnion’s 2016 Payment Shock Study finds that most borrowers have been able to absorb their increased monthly payments after the Federal Reserve’s rate hike in December 2016. The study found 63 million Americans who carry balances on their variable rate credit cards would feel the sting of the December 2016 rate hike with higher monthly card payments.

The updated study, which tracked these consumers through March 2017, found that only 1 million of these consumers were delinquent at the end of March. “Most consumers appeared able to reallocate their available cash, or make small changes to their spending habits, to effectively absorb the December rate increase,” Ezra Becker, senior vice president of research and consulting at TransUnion, said in a news release.

TransUnion notes, though, that the study does not look at how consumers might be impacted over a longer period of rising interest rates.

With four Fed rate increases since December 2015, and one more in the forecast yet in 2017, the additional costs in interest are adding up, especially if you have large balances on your cards.

What you can do to cut your card debt
As credit card APRs continue to climb, acting now to lower your interest payment and pay down your balances will save you money and offer better long-term financial security.

Here are five ways to cut your credit card debt now:

1. Transfer your debt to a 0 percent balance transfer card.
Consider a 0 percent balance transfer card, which will allow you to move existing balances to a new card with no or low interest for an introductory period.

Borrowers with good credit can find balance-transfer cards with a 0 percent introductory rate for a year or more. A few cards offer 0-percent interest on balance transfers for 21 months.

Pros: You’ll get a temporary breather from interest payments, which will allow you to put your entire payment toward reducing principal.

Most balance transfer cards have balance transfer fees, typically 3 to 5 percent of the balance, so look for one that doesn’t carry a fee, or make sure the fee doesn’t outweigh the interest savings. You’ll also owe interest on any remaining balance once the introductory offer expires, so do your best to pay if off entirely before then.

Interest-free transfers are also typically only available to borrowers with the best credit, so if your score needs work, you may not qualify.

“The initial impact may be small, but it can end up being death by 1,000 cuts.”

2. Ask for a lower interest rate.
Nearly seven in 10 consumers who asked their issuer for a lower interest rate received one, our 2017 survey on getting better credit card terms found.

“If you have been a good customer and you see competing rates that are lower than yours, there’s an excellent chance that they’ll give you a modest concession just to keep you,” says Mike Sullivan, personal finance consultant for Take Charge America. 

Pros: It’s often easy to get a lower interest rate. It takes very little time or effort to make a phone call to your issuer. (See: Script to ask for a lower credit card rate.)

Cons: Even low credit card interest rates currently average nearly 13 percent, according to the CreditCards.com Weekly Rate Report. 

3. Consolidate debt with a personal loan.
You can use the proceeds from a personal loan to pay off one or more credit card balances. The interest rates for borrowers with good credit can be less than some credit card APRs.

Pros: Personal loans are fixed, so you’ll lock in a low rate and won’t have to worry about the rate edging up as interest rates climb.

Cons: You may have to pay origination fees on the loans. You’ll also have to be vigilant about not running the balance back up on your credit cards once you’ve paid off your balances.

4. Roll your card debt into your mortgage. 
While mortgage interest rates are also going up, they remain close to historic lows. If you’re able to lower your mortgage rate through a refinance and you have equity built up in your home, you might consider doing a cash-out loan in order to pay off your credit card debt. 

Pros: Mortgage rates are lower than most other types of debts, and you may get tax benefits on interest payments.

Cons: Refinancing can be expensive and time-consuming. Plus, you’ll be securing your debt with your home, which means the stakes are much higher if you have trouble paying in the future.

5. Tap savings to pay off your card debt.
While it almost never makes sense to tap into retirement savings to pay off your debt, you might consider using other savings to do so. 

Pros: Low interest rates on bank savings accounts means that the return on investment for paying down high-interest credit card debt is significantly higher than your return for keeping money in the bank.

Cons: If you use up your emergency savings paying down credit cards, you may end up without cash when you need it.

“One of the benefits for consumers of rising rates, is you may see interest rates for savings also going up.”

Next steps: Cut costs, raise cash.
Once you’ve lowered your interest rates as much as possible, make a plan to deal with any remaining debt. Automate your payments to cover at least the minimum payment on each card, so that you don’t rack up late fees for missing a payment.

Then, take a hard look at your budget to see where you can start cutting back or how you can bring in additional income. (See: You did WHAT to pay off your debt?)

Deploy any extra cash strategically. You’ll either want to follow the avalanche method, in which you direct all cash to the highest-interest rate account first, or the snowball method, in which you direct all cash to the smallest balance.

Once you’ve paid off that first account, apply that entire payment to the debt with either the next-highest-interest rate or the next-smallest balance.

The avalanche method will save you the most money overall, but you’ll knock out accounts more quickly with the snowball method, which may motivate you to continue erasing your debts.

After debts are paid, start saving.
Eventually, you’ll want to put that monthly payment into an emergency savings account, so that you won’t need to turn to credit cards for unexpected expenses down the road.

“One of the benefits for consumers of rising rates, is you may see interest rates for savings also going up,” says Matt Freeman, head of credit card products at Navy Federal Credit Union.

See related: Fears rise of consumer debt delinquency, N.Y. Fed survey shows4 options to tackle credit card debtCharged Up! podcast: Getting out of debt in style

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Updated: 01-16-2018