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How to pay off credit card debt with 20% interest

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

The average annual percentage rate on a new credit card is now over 20%, according to The LendingTree tracker. This is the first time rates have exceeded 20% since the tracker launched in 2018.

“When you take into account 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 rates are about to go even higher across the board.

In June, the Federal Reserve raised its benchmark interest rate by 0.75 percentage points, the biggest increase in 28 years, and announced that it would continue to raise rates throughout the year to curb inflation.

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The rates consumers are paying on credit card debt track Fed actions very closely, according to Schulz.

“Chances are we’re a long way from where rates are going to peak,” he said.

This could pose a problem for Americans with unpaid bills.

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

Look for lower rates to pay off your debts

It’s a great idea to try to tackle outstanding credit card debt, if you have any, to avoid paying more on that balance as interest rates rise.

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

One of the first steps Orman advises anyone looking to reduce their credit card debt is to see if you can lower your interest rates.

This will help you pay off your debt faster and ensure that more of your money goes to eliminating what you owe, instead of accumulating interest.

There are several ways to do this, such as a balance transfer to another credit card with 0% interest rate for a certain period, taking out a personal loan with a lower interest rate to pay off your credit balance or working with a credit counselor to consolidate your debts with a lower rate.

These options will depend on your personal situation and credit score, Orman said.

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

Choose a refund method

According to John Scherer, a certified financial planner and founder of Trinity Financial Planning in Madison, Wisconsin, if you’re going to pay off debt while keeping your cards open, there are generally two methods people use to clear a balance.

The first is to round up all your outstanding debts by balance and pay off the smallest first.

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

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

Orman also recommends this approach.

It says to round up your credit card debt and add up all minimum payments due 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, transfer that extra payment to the next card, then to the next until it’s all cleared.

Boost your savings

In addition to paying off your debt, be sure to put money aside to build up emergency reserves, Scherer said. This is to prevent you from racking up more debt while you work to pay off your existing balance.

“You paid for it, but then the transmission blows up or the fridge crushes 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 use them so much, 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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