Categories: Business

Why is it an important time to pay off your credit card debt?

NEW YORK — Financial stress is rising for Americans who had no savings before the pandemic. Experts say inflation, rising interest rates and the expiration of pandemic-related aid — such as suspending student loan payments — have led to historic high credit card debt.

Americans will hold more than $1.05 trillion on their credit cards in the third quarter of 2023, and The average interest rate on credit cards is currently about 21.5%, the highest since the Federal Reserve began monitoring rates in 1994. A recent report from credit rating company Moody’s showed that current credit card defaults are far higher than 2019 levels.

Silvio Tavares, president and CEO of VantageScore, one of the nation’s two largest credit rating systems, said: “The reality is that there are quite a few signs of stress,” even as consumers report good health. Financial, in general terms.

If you’re facing increased credit card debt while feeling the effects of inflation, consider the following:

Ask for a reduction in your interest rate

One of the first things you should do is ask the company that issues your credit card to lower their interest rates. While the Federal Reserve signaled Wednesday that its first interest rate cut is likely to happen within several months, the average credit card interest rate is already well above the rate set by the Fed. Most companies offer promotional rates and ways to transfer your balance to a card with lower interest rates, at least for the first year. These promotions can keep your debt from increasing. That said, you’ll likely have to pay a balance transfer fee and pay off your balance before a certain promotion window ends, otherwise additional interest will accrue. Furthermore, reports on banking industry sentiments show that banks are becoming increasingly conservative when making loans, meaning they may find it more difficult to refinance.

Pay off your high-interest debt first

Known as the “avalanche approach”, it will always be more efficient to pay off the debt that is accruing interest the fastest than starting with the debt with the lowest interest. This is the smartest financial way to manage your debt. Another strategy, known as the “snowball approach”, considers the psychological rewards of paying off smaller debts first, which can increase confidence before embarking on larger debts. Some financial advisors believe this approach is more motivating. You can get free counseling from the National Foundation for Credit Counseling at nfcc.org.

Consolidate Your Loans and Reduce Your Student Loan Payments

Advisors encourage consumers to consolidate their debt with fixed rates whenever available. The Federal Trade Commission’s Consumer Guide to Paying Off Your Debt can help you make a plan. When it comes to student loan payments, make sure all those loans are consolidated and you’re taking advantage of any opportunities to lower your monthly costs. The Public Service Loan Forgiveness (PSLF) program is one of several forgiveness options still available to many student loan borrowers. Other sources for borrowers include: false certification, borrower defense, educational institution closure, total and permanent disability, as well as alternative compensation programs such as income-based repayment.

budget for inflation

While inflation is below its peak, prices for many goods and services remain high. A loaf of bread that cost $1.54 in December 2020 cost $2.02 at the end of last year, according to the Bureau of Labor Statistics. According to Realtor.com, the average rent for a property with up to two bedrooms increased from $1,424 at the end of 2020 to $1,713 at the end of last year.

America Saves, a nonprofit campaign of the Consumer Federation of America, also offers counseling.

Since the pandemic, some monthly service providers are more open to negotiating their bills — whether it’s utilities, cable TV, phone, internet or auto insurance. Making these calls can lead to significant savings, said Kia McAllister-Young, director of America Saves. He recommends calling for the lowest rates, discounts and coupons available. If a supplier competes with other companies, it is more likely to receive discounts.

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