Posted by Cindy Wilson.
The cost of credit card debt has been soaring—in 2017, interest rates reached an 18-year high. With borrowing becoming so costly, you need to do everything you can to pay off your debt faster—and avoid getting into any more of it. Here are five things you should be doing with your credit card debt:
- Find out what your interest rate is. I bet you know what your rectangular plastic friend looks and feels like, down to its color and texture. After all, you handle it every day. But there’s a good chance you couldn’t tell me, off the top of your head, its most important quality: The APR. Many of us carry around, swipe and insert credit cards that have interest rates north of 20%—without even knowing it. Most credit card contracts have variable interest rates, meaning your APR is likely to be higher than it was a few years back, when you first signed up for the card. As I write this, the national average is around 17% APR. Usually from the same bank that offers you only 2-3% interest when it borrows your money (in the form of a Certificate of Deposit). How is this possible? One reason: Before the CARD Act was implemented in 2010, banks could reduce an individual borrower’s interest rate based on her FICO score. Now, they don’t have that ability to adjust your APR in real time. Therefore, even if you saw your credit score improve in the last few years, most likely, you’re charged the same interest rate as people with far worse credit.
- Switch to a better rate. The good news: There are lower rates out there for people with a decent credit score. The only way to unlock the low APR you deserve is if you do something about it. Search online for balance transfer offers (usually only available to those with good FICO scores). Transferring your balance could save you money and free you from debt faster. Your current credit card company may even be able to match the best rate you find online, rather than lose you to a competitor. Call them to find out what your options are. A lot of the APRs you see online are only introductory rates—they aren’t going to stay that low forever. Set a reminder in your calendar for when that introductory period ends, so you can review your options again.
- Accrue interesting rewards—not interest. Of course, if you aren’t accruing any actual interest, it doesn’t matter how high your interest rate is. You may be diligent about paying off your balance in full each month, using your card just for rewards or building your credit score. In that case, make sure you are using a card that accrues rewards valuable to you. For example, if you are interested in traveling, switch to a card that earns you air miles.
- Never miss a minimum payment. Spending tends to spiral out of control around the end of the year, and we often carry over bigger-than-usual credit card balances. Try as we might, we can’t always clear them in full during the early months of the new year. Or an emergency may come out of nowhere and suddenly, you need to borrow an amount that will take several months to pay off. With interest rates being so sky-high, the key thing to do is to set yourself a strict time frame for settling your debt. Paying off your debt in full each month is highly desirable—but paying the minimum is an absolute necessity. Otherwise, your lender will typically hit you with a fee plus your interest rate could shoot up to a “penalty APR”—as much as 30%, currently.
- Use your debit card instead. A rule of thumb I’ve always found useful, but with today’s interest rates, essential: Use a credit card only for emergencies. Your car breaking down is an emergency, holiday gift-giving is not. For everything else, use a debit card. In other words, money you already have. The cost of borrowing is just too high right now. If you are overspending, consider picking up a side hustle and do more work around budgeting to keep your spending in check.