Americans know the holiday shopping season can be rough on their credit card balances. What makes that especially ominous this time around is that consumers entered this year's spending spree with those card balances more burdensome than ever.
Between rising credit card interest rates (and they're going up again with the recent Federal Reserve interest rate hike) and near-record credit card debt outstanding, Americans are currently on pace to pay more credit card interest than ever before.
Are you part of that trend? Understanding recent developments could help you put your own credit card debt situation in perspective. Better yet, there are steps you can take to reduce your credit card interest burden. This article will outline recent trends in credit card interest expense, and then offer some tips for getting your credit card debt under control so you can stop providing the card companies with record revenues.
Credit card interest – costing consumers more than ever
According to figures from the Federal Reserve and analysis by CardRatings.com, total credit card balances outstanding recently crossed the $1 trillion threshold for the first time since the Great Recession. In fact, the first time those balances ever reached the $1 trillion mark was in December of 2007, which is when that recession started.
As if any comparison between current conditions and those at the start of the Great Recession weren't scary enough, what makes credit card debt even more burdensome today is the fact that the combination of that high debt level and a recent rise in interest rates means that Americans are paying more credit card interest than ever before.
According to the Federal Reserve, the average interest rate charged on credit card balances has jumped by more than 1 percent over the past year, to 14.89 percent. Apply that rate to a seasonally-adjusted total of just over $1 billion in credit card debt outstanding and it means Americans are paying credit card interest at an annual pace of $150.6 billion. This surpasses the previous high in credit card interest expense of $149.8 billion set in October of 2007.
These credit card debt and interest burdens are likely to get worse before they get better, because the most recent figures come just before the start of the holiday shopping season. Historically, Americans have run up twice as much credit card debt in December than in any other month.
The high cost of this debt is affecting an increasing number of Americans. According to recently-released survey data from the Federal Reserve, 43.9 percent of families now carry credit card debt balances, compared to 38.1 percent just three years earlier. In other words, the Great Recession may officially be over, but that hasn't stopped people from running up debt on their credit cards.
If you're among those carrying credit card debt and paying the high interest that goes with it, one of the best financial moves you can make is to reduce that interest burden.
Reducing your interest burden
The amount of interest you pay is a function of the size of your balance and the interest rate on your credit cards. Thus, paying down your balance and finding lower credit card rates are both ways of reducing your interest burden. Here are some steps to consider:
- Work on your credit rating. The lower your credit rating, the higher the interest rate card companies are likely to charge. So, improving your credit rating can be a first step to reducing your interest burden by lowering the interest rate on your credit cards. Start by checking your credit report so you can address any mistakes or readily-addressable problems. Then get organized to make sure you pay your bills on time and start to build a more attractive credit history.
- Find a better rate. Next, start shopping. No, not the kind of shopping that built up your credit card balance in the first place, but comparison shopping to find better credit card rates. Online resources make it easy to identify a variety of credit card offers that you can compare to the rates you are currently paying. You might find that the cards now in your wallet are not as competitive as you thought. Just a couple cautions about finding better rates: Most credit card offers you see will quote a range of rates, and often that range can be quite wide, such as "11.99 to 23.99 percent." One value of knowing your credit rating going into this process is that when you look at offers you can judge whether you are likely to be offered a rate on the higher or lower end of that range, and compare accordingly. Also, when you shop for rates, pick your spots and don't open more than one or two new accounts, because new credit accounts and applications can be a factor in lowering your credit rating.
- Shift to lower-interest debt. Once you've identified the lowest interest rate you can find, try to consolidate your existing credit card debt onto that card so you can pay a lower interest rate. You might also consider shifting balances to cheaper forms of debt such as a mortgage or a personal loan, though not before budgeting to make sure you can meet the payment schedule on such loans.
- Handle balance transfer offers with care. Balance transfer offers are tempting for people with credit card debt - they often offer 0 percent interest for a set period of time - often 12-18 months - on balances transferred from other cards. That can be a good way to reduce your interest burden, but there are two cautions you should take in doing this: First, watch out for balance transfer fees both on your current cards and on any potential new cards. In some situations, these fees can negate the rate advantage of balance transfers. Second, unless you are confident in paying off your balance in full by the end of the 0 percent interest period, pay attention to what happens to the interest rate after that. You don't want to end up paying a higher rate in the long run.
- Put your credit cards on a leash. Only take them out with you when you plan on using them, and only use your credit cards for budgeted purchases. Cutting down on impulse spending is an important step towards getting credit card balances under control.
- Make this a green Christmas. Green as in cash. Whatever holiday you buy presents for, try heading out the door with a set amount of cash and resolve to spend no more than that. The open-ended nature of credit card spending often leads people to bump up their gift-buying more than they should.
- Recognize that minimum payments = maximum interest. The minimum monthly payment on your credit card bill might seem very friendly - an easy-to-digest, bite-sized portion of what you owe. The problem is, those minimum monthly payments are not really designed to make your burden easier. Their real purpose is to stretch your debt out over as long a period as possible so that you pay more interest. Paying off credit cards with minimum payments can take decades, and in the process you could pay more in interest than the amount you originally borrowed. Take advantage of payment calculators to determine how much you'll need to pay each month to pay off your card in a set period of time.
- Put your raises towards debt reduction. Reining in spending may seem easier said than done if you are struggling to make ends meet. However, as wages typically rise over time you can pay down your debt by dedicating the majority of any raises you get to paying off your existing balances, starting with the higher-interest credit cards first. Making this sacrifice in the near term will lead to a higher standard of living in the long run.
Whatever the size of your balance, at 14.89 percent credit card interest is not cheap, and many Americans pay much more than that. Make it a priority to pay less to the credit card companies and keep more money for yourself in 2018.