Carrying credit card debt is becoming an increasingly costly affair. In recent years, the average interest rate on credit cards has skyrocketed and is now over 20%. According to the Consumer Financial Protection Bureau (CFPB), in 2022, the most recent year for which data is available, credit card companies charged consumers more than $105 billion in interest. Consumer credit card debt also hit a record high of $1.14 trillion as of the second quarter of 2024.
Credit card interest is a dangerous path that can make it difficult to get out of debt. Luckily, there are ways to avoid this unnecessary debt or deal with it responsibly if you are faced with it.
1. Consider 0% APR offers
Balance transfer credit cards offer a way to pay off high-interest debt with a 0 percent introductory period, helping you consolidate your debt and pay it off faster. The best balance transfer cards offer introductory periods of up to 21 months, meaning the entire amount of your monthly payment goes directly towards paying down your principal, helping you get out of debt faster.
But before you consolidate your debt with a balance transfer card, consider a transaction fee of 3 to 5 percent for each balance you transfer. That means if you move $5,000 to a balance transfer credit card, you could pay $150 to $250 in fees, if you qualify for the card.
Balance transfer cards are typically only available to those with good credit, and borrowers must be completely confident that they can pay off the balance within the specified promotional period.
Sean Fox
Debt Resolution with Achieve
If you don’t pay off the balance within the promotional period, you’ll end up paying interest on the balance and it could come back to haunt you. You’ll also start paying interest on any new debt you add to the card during that time.
If your credit history isn’t good enough to get approved for a credit card, consider taking out a personal loan or debt consolidation loan to pay off your credit card debt. Personal loan interest rates are much lower than credit card interest rates.
“If you have multiple credit card accounts and are racking up high-interest debt, consolidation is a great idea,” says Fox. “You can pay off the balances on your high-interest accounts with a new loan that has a lower interest rate than your credit card, so you’ll only have one low-interest monthly payment.”
2. Pay often
You can reduce the interest you pay on your credit card debt by paying off your balance in multiple installments each month. This step reduces your average daily balance, which most credit card issuers use to calculate the amount of interest you pay at the end of the month.
Let’s say you have a credit card with a $6,000 balance, and you budget $1,000 to pay your credit card bill for the month. If you make a single payment of $1,000 at the end of your billing cycle, your interest is calculated based on your average daily balance of $6,000. However, if you split the $1,000 into two payments, with one payment in the middle of the month, your average daily balance would decrease by $500.
If you receive multiple paychecks during a month, consider setting aside an amount from each paycheck to put toward your credit card payments. Use a credit card payment calculator to see how increasing payments will affect your debt.
3. Use existing savings
When you’re trying to save money, taking cash out of long-term savings to pay off debt may seem counterproductive. But if you have a savings account open, it may be a strategy that makes sense in the long run. That’s because credit card interest rates have reached all-time highs, so even if you put money in a high-yield savings account, the interest you’ll pay on your monthly carried balance will exceed the interest you would have earned many times over.
Add to that the fact that credit card issuers typically charge interest on your average daily balance, which means that if you carry a balance, you’re paying interest on interest, which compounds your debt. If you have savings and can apply them to your card debt, it can reduce the total amount of interest you end up paying in the long run.
“Anything you can do to increase the amount of money you have available to pay off your debt will help you pay off your debt faster,” Fox says.
If you can find ways to cut your expenses or increase your payments, you can eliminate debt while keeping your overall interest rates as low as possible.
4. Call your issuer and ask for a lower interest rate.
While interest won’t go away completely, calling your credit card issuer may help lower your interest rate, even if only temporarily.
“Credit card interest rates aren’t always set in stone, so you might be able to lower your interest rate by just asking. A lot of people have had success with this,” says Russell Nelson, former credit card product manager and now contact center strategy manager at Navy Federal Credit Union.
You may be able to qualify for a more favorable interest rate if your financial situation and credit score have improved since you first opened the card, and if you’re a good customer who has made regular, on-time payments every month, pointing that out when you call your credit card company could work to your advantage.
It’s also a good idea to do some research to find out what interest rates other credit card issuers are offering.
“The best way to go into these negotiations is to know your options,” says Peter Earl, an economist at the American Institute for Economic Research. “Make it clear that you know what other options are out there and that you’ve considered alternatives that could save you money. Credit card companies are businesses, so they’re going to want to offer you better terms on the terms of your debt than if you were to move your balance elsewhere.”
5. Create a monthly budget
The convenience of credit cards can lead to overspending and accumulating more debt than you can comfortably repay. Remember, you will eventually have to pay back the money you borrow from the credit card company, so it’s important that you have the means to do so.
Creating a monthly budget that takes into account all your monthly expenses and income will help you stay on track. When creating your budget, take into account bills that you only pay periodically or semi-annually, such as insurance policy renewals.
Consider using a budgeting app that will track all your spending and expenses and alert you when you’re over your monthly budget goal. Many of these apps will also identify areas where you can potentially cut costs, freeing up more funds to pay off your credit card debt. Popular budgeting apps include Monarch Money, You Need a Budget (YNAB), and EveryDollar.
Conclusion
Credit cards are useful financial tools and offer many perks and benefits, but they do have high interest rates. The best way to get the most out of your credit card is to pay off your balance in full each month. If you can’t, consider a balance transfer card with a 0 percent interest rate or call your credit card issuer to negotiate a lower interest rate. Increasing your income can also help you get out of debt faster.
Whatever approach you take, it’s always a good idea to create a budget that will help you stay on track financially over the long term.
