Now's the time to pay off credit card debt before Fed hikes add up

As Americans return to their old spending habits and ramp up credit card debt, they’re also amplifying their risk as interest rates rise.

Credit card bills grew at the fastest pace in 22 years in the last three months of 2021, with cardholders owing a collective $856 billion. Experts expect that to expand even more, with total debt to surpass pre-pandemic levels as Americans rely more on credit to compensate for higher consumer prices.

Those ballooning balances come as the Federal Reserve starts its rate-hiking campaign to combat rampant inflation, with the central bank this week raising a benchmark short-term interest rate by a quarter-point. That hike directly affects your credit card rate.

“For most people with debt, [the first rate hike] may end up adding $10 to $15 in interest over the life of the balance,” Matt Schulz, chief credit analyst for LendingTree, told Yahoo Money. “The bigger danger comes if the Fed starts raising rates several more times and by bigger amounts. That’s when things can start adding up for folks with credit card debt.”

Fed officials said “ongoing increases'' should be expected in the near future, with the central bank planning as many as six more rate hikes this year to pull inflation down to its 2% target.

So what does that mean dollar-wise for debtors?

Someone with the average credit card debt of $6,569 with a 15% APR making the minimum payment (based on 2% of the balance) would end up paying $10,129.70 in interest over the life of the loan. If that rate is 16.75% — rising after the potential six Fed rate increases — the interest over the life of the loan totals $13,484.15, or more than $3,000 more, according to the debt calculator from the nonprofit GreenPath.

You still have time. The first hike won't be reflected in your credit card rate until after 30 to 45 days. In the meantime, here’s how you can avoid getting caught in the interest rate increases to come.

Consider a 0% balance transfer card

One good tool for those struggling with debt is opting for a 0% balance transfer credit card, according to Schulz. These cards are widely available and many allow you to avoid paying interest on the transferred balances for up to 21 months.

While 0% balance transfer cards may look attractive for those carrying high interest rate debt, you must be disciplined in paying it off — or else you could end up compounding your debt problem.

“Balance transfers and introductory rates may help, but they can also get people into more trouble,” Rod Griffin, senior director of public education advocacy for Experian, told Yahoo Money. “I’m an example of that. When I was younger, I did a balance transfer from one account to max it out on an account with zero balance and low interest. Then, I had two accounts and maxed them both out.”

According to Griffin, before you opt for a balance transfer it’s critical that you understand the terms and conditions of your credit card. Most credit card issuers will impose a credit limit on the amount you can transfer and if you surpass that limit, it could negatively affect your credit score as it may increase the amount of available credit you use.

You could also be at greater risk to take on more debt and not be able to pay it off within your introductory timeframe, which could result in a higher interest rate than your original account.

“You have to know yourself,” Griffin said, “and if you’re tempted to use a card because now you have an available card and can’t resist temptation it may not be the right thing for you.”

Still, if you can at least minimize one high-balance credit card and you can be responsible for managing your debt – a 0% balance transfer could be a relief on your wallet.

“The best thing you can do is knock down that card debt as soon as possible,” Schulz said. “The possibility of going those 2 years without accruing interest on your balance is a really big deal. It can reduce the amount of interest that you pay over the life of that balance but it can also shorten the amount of time it takes to pay that balance down so that’s worth looking into.”

Ask for a lower interest rate

Another option that many credit card holders don’t think about is picking up the phone and asking their credit card issuer for a lower interest rate. According to a LendingTree report, only 27% of cardholders requested a lower APR rate last year, up from 25% in 2020.

“Around 83% of cardholders who asked for a lower APR rate last year were successful, but far too few people asked," Schulz said. “You don’t have to have perfect credit to get your way, so it’s definitely worth asking especially if you do have good credit."

Let your credit report be your guide

If you’re not sure where to get started as you manage your credit card debt, you can start by checking out your credit report.

“Take a look at your credit report, see the accounts you have and where your balances are,” Griffin said. “You need to know where you stand before you can do something about it.”

For example, Experian offers a free tool where you can view your credit score and keep track of your monthly credit report. According to Griffin, this can help credit card holders easily keep track of their spending and manage their debts.

No matter how you plan to tackle the debt, sooner is better than later, experts said.

“The fact that the Fed said it expects to raise rates another six times in 2022 adds even more urgency for cardholders,” said Schulz. “That would mean that credit card APRs would be nearly two percentage points higher at the end of the year than they were when the year began, and they were already really high to begin with. Factor in rapidly-growing inflation and that puts folks with debt in a really tough spot.”

Gabriella is a personal finance reporter at Yahoo Money. Follow her on Twitter @__gabriellacruz.

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