Average credit card interest rates have exceeded 20%. Here’s how to pay off that debt fast – CNBC | Vette Leader

Rising interest rates have pushed annual percentage rates on credit cards to new highs.

According to LendingTree’s tracker, the average APR for a new credit card is now more than 20%. It’s the first time rates have exceeded 20% since the tracker began in 2018.

“Given that the cost of everything seems to be rising daily, the last thing consumers need is for credit card rates to hit a new high, but that’s where we are,” said Matt Schulz, chief credit analyst at LendingTree.

And interest rates are poised to hike even higher across the board.

The Federal Reserve raised its benchmark interest rate by 0.75 percentage point in June, the largest increase in 28 years, and signaled that it will continue raising interest rates throughout the year in a bid to curb inflation.

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The interest that consumers pay on credit card debt closely follows the Fed’s actions, Schulz said.

“Chances are we’re nowhere near where prices will peak,” he said.

That could pose a problem for Americans with outstanding bills.

Credit card balances hit $841 billion in the first three months of the year, according to a report by the Federal Reserve Bank of New York. During the same period, 229 million people opened new credit card accounts, up from the previous quarter.

Look for lower interest rates to pay off debt

It’s a great idea to try to tackle outstanding credit card debt to avoid having to pay more on that balance when those interest rates go up.

“The number one key to getting out of credit card debt is not paying high interest on that debt,” said Suze Orman, a personal finance expert.

One of the first steps Orman recommends for those looking to reduce credit card debt is to see if you can lower your interest rates.

This way, you can pay off your debt faster and ensure that more of your money is used to pay off your debt instead of accumulating interest.

There are a few ways to do this, such as For example, transferring your balance to another credit card with 0% interest for a period of time, taking out a personal loan with a lower interest rate to pay off your balance, or working with a Schufa advisor will consolidate your debt with a lower interest rate.

Those options depend on your personal situation and credit history, Orman said.

For those with lower scores, she recommends contacting the National Foundation for Credit Counseling for assistance in lowering your interest rate and completing a payment plan.

Choose a repayment method

When you’re paying off your debt while keeping your cards open, there are generally two methods to wipe out a balance, according to John Scherer, a board-certified financial planner and founder of Trinity Financial Planning in Madison, Wisconsin.

One is to round up all your outstanding debts on balance and start paying off the smallest ones.

“Then you get going,” said Scherer. “You see some of these things falling off the books, and it feels really good.”

The second model that Scherer personally recommends to his clients is to look at all outstanding debts and pay off the ones with the highest interest rate first. Over time, this means paying less money to pay off your debt because you’re tackling the highest interest rates right away.

Orman also recommends this approach.

She tells you to round up your credit card debt and add up all the minimum payments you owe 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 off, roll that extra payment onto the next card, and then onto the next until it’s all wiped away.

Increase savings

In addition to paying down debt, be sure to set aside some money to build up emergency reserves, Scherer said. This is to keep you from accumulating more debt while you work to pay off your existing balance.

“You get paid it, but then the transmission breaks down or the fridge thwarts you, and now you’re back on the credit card for another thousand dollars,” he said.

If you want to keep your credit cards open so you don’t mess up your credit score but don’t use them that often, Orman suggests hiding them from yourself.

“What you might want to do is take all your credit cards, put them in a plastic bag and put them in the freezer,” she said. “Don’t be tempted.”

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