Credit Card Interest Rates are on the rise.
Here’s why it matters.
Any future Fed rate hikes mean higher interest rates for credit card holders. Lenders typically raise their rates by a similar amount within one to two billing cycles—meaning January to February, for the December hike.
Higher interest rates are a big deal, because they can cost you more money and make it harder for you to pay off your debt.
- The higher the APR, the more you’ll pay in interest over time.
- The higher your balance is (and the longer it takes for that balance to be paid off), the more likely it is that you’ll end up paying thousands of dollars in interest charges.
- If this sounds like something that could happen to anyone at any time–and not just people who have bad credit scores–it’s true!
How Expensive Is Credit Card Debt?
Higher interest rates mean you pay more for every dollar you borrow. The more you borrow, the more money it costs to service your debt. That means less cash on hand for other things and creates stress in your life as well as making it harder to save or invest in your future.
Scenario: You have a card balance of $5,000
If your credit card balance is $5,000, a 0.25 percentage point increase in the APR would mean you’d have to pay $100 more in interest over the course of a year.
If you’ve got debts on multiple cards and can’t pay them off in full each month, consider consolidating your debt onto one card with a lower interest rate.
Scenario: You have a card balance of %10,000
If you carry a balance on your credit card, this is important to know. If your balance is $10,000 and you’re paying 18 percent interest, a 0.25 percentage point increase in the APR would turn into $250 more in interest per year — a big difference for those who carry large balances on their cards.
Minimize the damage when your credit card interest rates go up.
Now that you know what’s going on, here are some things you can do to minimize the damage if your rates do go up:
- Maintain a low balance. The best way to keep your credit score healthy is by keeping your balances low and paying them off every month, but if that’s not possible for whatever reason (you need more time), then at least try not to let them get too high.
- Pay off your balance each month. Even if you’re only going from 20% APR down to 15%, it adds up over time! So pay those bills in full each month instead of carrying around any unnecessary interest charges–you’ll be glad when they’re gone later on down the road when they come due again (and hopefully at lower rates).
- Don’t carry a balance on your credit card unless absolutely necessary; and even then only use an amount equal or less than what’s available as cash advance limit so as not end up paying excessive fees and high interest rates just because someone forgot where their money went last night after having too much fun out with friends…
Can I Avoid Paying Interest on My Credit Card?
There are typically two ways to avoid paying credit card interest.
One is if you pay your card off in full each month, which allows you to take advantage of your grace period. But know that if you roll a balance over from month to month—for example, if you only make the minimum payment due—you’ll lose your grace period and incur interest charges. And you’ll be charged interest not just for the month you carried a balance but for the following month as well.
The other way to avoid credit card interest is to take advantage of a card with a 0% introductory APR. These cards offer intro periods of 0% interest for new cardholders, often ranging from 12 to 21 months long. Some cards have intro APR offers on new purchases, others on balance transfers and some on both. But be aware you still have to make at least the minimum payment due each month, even though you’re not being charged interest while in the promotional period.
0% intro APR credit cards are typically reserved for applicants with good or better credit. A good credit score is generally considered a FICO Score of 670 or higher.
Steer clear of deferred interest offers. These may seem like 0% intro APR offers at first glance but are risky—if you fail to pay your balance off within the promotional period, you’ll be charged interest on the full purchase amount from the date of purchase, not just on what remains.
How Can I Get Out of Credit Card Debt?
So what should you do?
- Pay off your credit card balance in full each month. If you can’t pay it off in one go, set up a payment plan with your bank and stick to it. This way, you won’t accrue any interest charges on top of what’s already owed.
- Use a credit card that offers a 0% introductory APR on purchases for at least 12 months (or longer). That way, if rates go up while the introductory period is still active and makes it too expensive for you to make payments without incurring extra fees or penalties, then at least those costs will be contained until after the introductory period ends–and hopefully by then things will have stabilized again so that paying down debt becomes easier once more.* Try to pay off your credit card debt before the introductory APR expires.* Consider using cash back rewards cards instead of traditional ones if possible; some offer better deals than others when it comes time for redemption options such as cash back or statement credits rather than just points toward future purchases.
- A debt consolidation or home equity loan is another route, and the simplest way to consolidate high-interest debt. While it doesn’t get you out of debt, it does lower your long term cost of borrowing. And, with a loan, you have a set monthly payment and a predetermined payoff date—unlike a credit card, which allows you to continue with minimum monthly payments, potentially miring you in a cycle of increasing debt.
These simple financial tips can help protect you from higher credit card interest rates
To protect yourself from higher interest rates, you’ll want to:
- Pay off your credit card debt. The best way to avoid paying more in interest is by simply paying off your balance in full each month. If you can’t do that, at least try not to carry a balance on multiple cards; that will only keep your interest rate high and make it more difficult for you to get out of debt.
- Use a cash back credit card which typically offer lower rates. Then use that cash back to reduce your principal balances.
- Consider locking in your rate with a lower interest rate debt consolidation or home equity loan.Â
Take Control of Your Finances
While we don’t know yet how much more you’ll be paying on your credit card bill, it’s safe to say that this increase is here – and it’s not going away anytime soon.
Big banks have already passed on these higher costs to consumers in the form of higher fees and interest rates.
As credit card interest rates continue to rise, it’s time to take control of your finances. Don’t get caught paying more than you have to. Get started with a free credit card review today!
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