(NerdWallet) – Credit card debt can be difficult to manage even in the best of times, but increasingly high interest rates are adding to that challenge.
The Federal Reserve has announced a 0.75% increase to the federal funds rate — its largest hike in almost 30 years. Increases to this rate tend to make borrowing more expensive, which means that carrying a balance on your credit card may get pricier.
But by creating a plan to pay off your credit cards in the months ahead, you can save money on interest. Whether you tackle the debts one at a time or consolidate under a fixed-rate product like a personal loan, there are strategies that can help.
Why you should prioritize credit card debt
Most credit cards have a variable interest rate, meaning the rate can go up and down based on a few factors, including market conditions. Whereas fixed-rate products like personal loans may not see as much of a change in interest rates when the federal funds rate goes up, variable-rate products like credit cards likely will.
Higher rates on credit cards mean people will start paying more for carrying a balance, at a time when household budgets are already tight due to rising consumer costs, says Jeff Arevalo, a financial wellness expert at nonprofit credit counseling agency GreenPath.
It also can mean progress on other important goals, like saving up for a home, gets sidelined as more people focus on making ends meet. However, Arevalo says there’s still plenty of time to get ahead of a rising rates environment.
“When [the Federal Reserve increases] interest rates, it may take a month or two for it to fully impact credit cards, so ideally consumers can be proactive,” he says. “If you know these changes are coming, and you’re carrying these higher credit card balances, the key is not to be paralyzed by fear.”
Tackling your credit card debt: First steps
Brittany Davis, an accredited financial counselor who works with people struggling with credit card debt, says the initial steps to getting out of debt can be the most challenging for clients.
First, you need to confront the scope of your debt. Davis advises writing down your balance, minimum monthly payment and interest rate for each credit card to see the full picture of what you owe.
Then, she says, you can use an online tool, like a debt payoff calculator, to plug in the numbers and compare different strategies. Two popular payoff strategies are the avalanche and snowball methods. With the avalanche method, you start with the debt with the highest interest rate and work your way down, usually saving time and money on interest. With the snowball method, you start with the smallest debt and work your way up, which builds motivation.
Another tip from Davis: Stop using your credit cards for the time being, which involves looking at what sites and apps they’re already linked to. Though you may remember not to reach for a credit card when making a big purchase, it’s the smaller, recurring expenses like monthly subscriptions that sneak up on you.
“Money moves fast now,” Davis says. “It’s easy to forget where our cards are linked. If you’re really serious about not using a credit card while paying things down, make sure to switch those accounts to a debit card.”
Other strategies for tackling credit card debt
If your debt feels too overwhelming to tackle with the avalanche or snowball method, there are other strategies that can help lighten the load.
Negotiate with your creditors. It never hurts to get on the phone with your creditors and ask what they can do for you, Davis says, especially if you already have a relationship with them. Your bank or credit union may extend a lower rate, waive a fee or grant a higher credit limit, which can lower your credit utilization and help you access lower-interest financing in the future.
Just be aware of the effects of what you’re asking for. For example, extending a higher credit limit may require a hard credit pull, which can temporarily knock a few points off your credit score.
Consolidate your debts. If you’re carrying high-interest debt across multiple credit cards, consolidating is a smart move, particularly if you qualify for a lower rate than you’re getting on your current debts.
A 0% balance transfer card is one of the best ways to consolidate debt if you have good or excellent credit (690 or higher FICO score). These cards charge 0% interest during a promotional period — sometimes as long as 21 months — so if you transfer your debts to the card and pay it off within this period, you’ll pay zero interest. Some cards charge a balance transfer fee, usually 3% to 5% of the total transferred.
If you can’t qualify for a balance transfer card, a debt consolidation loan is another good option. These loans are available to borrowers across the credit spectrum, but they charge interest, which is fixed over the life of the loan, so you’ll make the same payment each month.
Reach out to a credit counseling agency. Finally, you don’t have to go it alone. Arevalo recommends looking for a reputable, nonprofit credit counseling agency that can help you build a budget, negotiate with creditors or enter a debt management plan.
A debt management plan typically consolidates credit card debts at a lower interest rate and gives you a payoff plan of three to five years. You may be charged a startup and monthly fee for using this service.
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