Credit card interest rates are climbing. Here’s how to tackle your debt

By Anna Bahney, CNN Business

Editor's note: A version of this story was originally published on January 31, 2022.

(CNN) - Interest rates are climbing this year on all kinds of consumer debt, and that's bad news for those who carry a credit card balance.

The Federal Reserve has been pushing interest rates higher in an ongoing campaign to battle inflation, announcing an unprecedented three consecutive 75-basis-point jumps. That has pushed up the cost of borrowing for many consumers.

Typically credit card users can avoid paying interest on purchases by paying their balance in full each month. But roughly half of all cards have an outstanding balance, according to LendingTree. For those borrowers, higher rates can be expensive.

Over the past six months the average annual percentage rate -- a card's interest expressed as a yearly rate -- has grown from 16.17% to 16.65%, nearing the all-time record high of 17.14% in 2019, according to the Federal Reserve.

Meanwhile, credit card debt has grown. Credit card balances grew 13% in the second quarter from the year before, the largest increase in more than 20 years, according to the Federal Reserve Bank of New York's Center for Microeconomic Data.

The rise seems to have been driven by higher prices, said Joelle Scally, administrator of the Center.

"While household balance sheets overall appear to be in a strong position, we are seeing rising delinquencies among subprime and low-income borrowers with rates approaching pre-pandemic levels," she said.

Build an emergency fund and use cards sparingly

While the impact of one interest rate hike may seem relatively small on its own, the cumulative effect of all five of this year's rate hikes from the Federal Reserve will cost the average consumer who has a credit card balance of about $5,200 roughly $156 more per year, or $13 each month, said Michele Raneri, vice president of US research and consulting at TransUnion.

For borrowers feeling the hit of inflation, budgeting and watching credit card spending should be part of their money practice. But it's especially important to keep some cash on hand, Raneri.

"Have an emergency fund at the ready," she said. "Three to six months of expenses ideally, but even a few hundred extra dollars can prove valuable."

She said borrowers should also take care to use credit diligently and with the understanding that as interest rates rise, so do minimum credit card payments.

"Only use credit to the extent you are confident you can afford to make those payments and avoid delinquency," she said.

Ask for a lower rate

Another strategy is to appeal directly to the credit card companies.

You are your own best advocate in getting out from under a high APR, said Matt Schulz, chief credit analyst at LendingTree. And you can start by calling your card issuer and asking for a lower interest rate, he said.

"People don't think it will work," said Schulz. But LendingTree's research indicates a majority of the time people who ask for a lower interest rate get one. "It can be a reduction of 10 percentage points or more. That is a significant thing."

But you don't have to be facing a financial hardship to potentially get a break on your APR. You don't need to have an 800 credit score either.

"The fact that the success rate is so high hints that people across the credit spectrum are getting their way," he said. "It is absolutely worth making the call."

One way to increase your chances of getting a lower rate is to come prepared with information on other card offers that you have seen available, he said.

"You can say, 'I've been a customer for a long time, but my interest rate is really high. I saw this card that gives me this rate, could you match it?' There is a good chance that they'll listen and possibly work with you."

If you have a hardship, such as a job loss or medical issue, you can mention that to your card issuer, he said.

"Banks have hardship programs where they will reduce interest rates, reduce minimum payments, waive fees, to get you over a short-term financial hump."

Transfer your balance

If you are not able to get your APR lowered and are still wrestling with debt, a balance transfer card can be useful, Schulz said.

"It can sound weird to get another card to help you, but a 0% interest rate on a balance transfer card can help you avoid accruing interest on that card for nearly two years," he said.

But it is very important to understand the fees, what the rate will be after the low rate period ends and if there are any deadlines with balance transfer cards.

You'll need good credit to get one of these cards, said Schulz, likely 660 or higher, although it will vary by issuer. But if you can, they can save you a lot of money, and banks are eager to lend if you have decent credit.

"Even though credit card rates have risen like crazy this year, 0% balance transfer cards are still everywhere," he said.

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