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Credit card interest rates are near historic highs. Here’s how to pay off your debt

Over the past two quarters, the average annual percentage rate has fallen from 15.91% to 17.13%, leaving the current rate just below the all-time high of 17.14% reached in 2019, according to the Federal Reserve.

The interest you pay your card issuer to borrow money when you use a credit card expressed as an annual rate is called an annual percentage rate or APR. Typically, users can avoid paying interest on purchases when they pay off their balance in full each month when the invoice is due. But about half of the cards have a balance, said Matt Schulz, chief credit analyst at LendingTree, and for those borrowers, higher rates can be costly.

A card user who owes $ 5,000 and pays $ 250 each month will pay an additional $ 81 over the life of that balance with an APR 17.13% higher than the 15.91% rate at the start of this year . Increase that debt to $ 10,000 and the interest payment difference between the two rates is almost $ 600.

This jump in the APR is eye-catching, Schulz said, because “we haven’t really seen APRs for new credit card offerings move much in recent years unless the Fed has made a move.”

One of the reasons rates have gone up is that more and more people with lower credit have recently been granted credit cards, Schulz said.

“The average APR is driven by more subprime cardholders carrying a balance while more premium cardholders are paying off their balances,” he said. “You have more people with higher APRs carrying balances and fewer people with lower APRs doing so, which drives up the overall average. “

Credit card balances are on the rise again

As credit card trends return to normal after banks cut back on credit card business at the start of the pandemic, there has been some growth in credit cards issued to people with lower credit scores, according to a new study from the Federal Reserve Bank of New York.

The good news is that people typically pay off their credit card debt, and the spike in delinquency that some analysts feared at the start of the pandemic has yet to materialize.

But credit card balances are starting to rise again, as pandemic government supports end and people return to more normalized spending habits.

Credit card balances edged up in the third quarter, by $ 17 billion, after a similar increase in the second quarter, according to the New York Fed. But credit card balances are still $ 123 billion lower than they were at the end of 2019.

“We are seeing an increase in credit card balances again in the third quarter after a solid increase in the previous [quarter]”said Donghoon Lee, research fellow at the New York Fed.” As the pandemic relief efforts wind down, we are starting to see the reversal of some of the credit card balance trends seen during the pandemic, namely the reduction of consumption and the reimbursement of balances. “

According to the New York Fed, credit card balances generally follow a seasonal pattern, which increases at the end of the year when people are shopping for the holiday season. This is usually followed by a sharp reduction in the first part of the year, as borrowers pay off their vacation debt, and small increases in the second and third quarters. After the pattern was disrupted by the pandemic, credit card use returned to its pre-pandemic seasonal norms.

But the pandemic and the economic recovery have widened the gap between the different types of card users. For many people whose work hasn’t been interrupted but their expenses have been, a year or more of travel restrictions and pandemic-related activities has allowed them to catch up.

While for other people – especially those paying higher APRs – the credit card has become a lifeline.

“As a result of the worst economic impacts of the pandemic, there is a group of people who are doing really, very well, who have the extra money and who are feeling good,” Schulz said, “and another under – set of people whose financial lives have been devastated and they are really in trouble. “

How to handle high interest debt

You are your best defender to come out of a high APR, Schulz said. 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,” he said. But LendingTree’s research indicates that the 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’s an important thing.”

How long will it take to pay off my credit cards?

One way to increase your chances of getting a lower rate is to prepare yourself with information about other card offers you’ve 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 that rate, could you match it?” He said. . “Chances are they will listen to you and possibly work with you.”

If you’re having any difficulties, such as job loss or a medical issue, you can talk to your card issuer, he said.

“Banks have hardship programs where they’ll lower interest rates, lower minimum payments, waive fees, to help you get through a short-term financial bump.”

If you’re having trouble lowering your APR and you’re still struggling with debt, a balance transfer card can come in handy, Schulz said.

“It might seem odd to get another card to help you out, but a 0% interest rate on a balance transfer card can help you avoid accumulating interest on that card for almost two years.” , did he declare.

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 delays with balance transfer cards.

“They are everywhere now and the banks are keen to lend if you have decent credit,” Schulz said.

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