Collectively, Americans owe nearly $1 trillion in credit card debt.
Total credit card debt at the start of 2023 was $986 billion, flat from the record high seen in late 2022, according to a new report from the Federal Reserve Bank of New York on household debt.
Balances typically drop at the beginning of the year as borrowers start paying down their debt after the peak holiday shopping season. “This is the first time in 20 years that we haven’t seen a decline,” New York Fed researchers say, citing inflation and a higher cost of living.
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Credit card balances are up nearly 20% year over year, according to a separate quarterly lending industry report by TransUnion.
According to TransUnion, the average balance increased to $5,733 over the same period.
“As inflation soared to near its highest level in 40 years, many consumers turned to credit to manage their budgets, resulting in record or near record balances,” said Michele Raneri, vice president of U.S. research and advisory services at TransUnion.
“Unfortunately, credit card debt is likely to continue to rise for the foreseeable future,” said Matt Schulz, chief credit analyst at LendingTree.
After another rate hike by the Federal Reserve earlier this month, the average credit card rate is now averaging over 20%, an all-time high.
With sky-high APRs, credit cards are one of the most expensive ways to borrow money month-to-month, yet many Americans continue to take on ever-increasing debt. While balances are higher, almost half of credit card holders have month-to-month credit card debt, according to a separate Bankrate report.
However, there are some strategies that can help pay off high-yield credit cards once and for all. Experts recommend:
Five ways to get on top of high-yield credit card debt
1. Rethink your spending. Most experts recommend starting with a base budget. “The truth is, you can’t create a meaningful debt-reduction plan without knowing exactly how much money is going in and out of the household each month,” Schulz said.
“You may not like what you see, but it’s better to face the reality of the situation than bury your head in the sand.”
Using a spreadsheet or an online tool, you can assess where you are spending money and how you can better allocate those funds.
2. Plan a payout strategy. According to Russell Nelson, manager of the credit card product acquisition team at Navy Federal Credit Union, there are two ways you can approach repayment: prioritize the debt with the highest interest rate, or pay down your debt from the smallest to the largest amount.
The avalanche method ranks your debt from highest to lowest interest rate. That way, you pay off the debt that earns the highest interest first. The snowball method prioritizes your smallest debt first, regardless of interest rate, to gain momentum in paying down debt.
With either strategy, you make minimum payments on all of your debt each month and invest excess money in accelerated repayment of a debt of your choice. “You might also consider setting up automatic payments along with text notifications on your mobile device to ensure payments are made on time,” advises Nelson.
3. Grab a credit card with 0% balance transfer. Cards with a term of up to 21 months with no interest on transferred balances are one of Americans’ best weapons in the fight against credit card debt, Schulz said.
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To get the most benefit from a balance transfer, aggressively pay off the balance during the introductory period. Otherwise, a new effective annual interest rate will be applied to the remaining balance, which Schulz says averages around 23 percent, which corresponds to the rates for new loans.
4. Ask for a cheaper credit card rate. If you have a balance, call your card issuer and ask for a lower APR. “You really have nothing to lose,” Schulz said.
In fact, according to a LendingTree report, 76% of people who requested a lower interest rate on their credit card in the past year received one. You may also be able to get a reduced annual fee, a higher credit limit, or a late fee waiver, Schulz added.
5. Take advantage of high-interest savings accounts. In addition to shedding your debt, set aside some cash to build your emergency fund. This will prevent you from accumulating even more debt while you work on paying off your existing balance.
“Robust savings are key to getting out of debt,” Schulz said.
Take advantage of competitive rates with an online bank, added Greg McBride, chief financial analyst at Bankrate.com. After years of rock-bottom yields, some of the top-yielding online savings accounts and one-year certificates of deposit now have interest rates as low as 5%.
“This could be the final call for savers,” McBride said, adding, “One year and longer CD yields have peaked and now is the time to secure yourself.”
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