Comparing Options: The Best Ways to Get Rid Of High-Interest Credit Card Debt

Discover how rate hikes impact credit card interest and explore effective debt consolidation strategies for managing and paying off debt.
Written by Kevin Payne
Financial Expert
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Credit card interest rates are typically much higher than other types of lending, like mortgages, personal loans, auto loans, and student loans. With recent rate hikes by the Federal Reserve and potentially more on the way, credit card interest rates are likely to keep rising. 

If you carry balances on your credit cards, the amount you pay in interest charges may increase with each Fed rate hike. Here’s a closer look at how federal rate hikes affect consumers with credit card debt and what you can do if you carry a credit card balance.

Why Does The Fed Raise Interest Rates?

The Federal Reserve does not set the interest rates on your credit cards or mortgage or the rates you earn on deposit accounts at your bank. It is responsible for setting the federal funds rate, which directly impacts the rates set by banks and lenders.

One of the roles of the Federal Reserve is to analyze U.S. economic conditions and make policy changes as necessary. Rate hikes are the FED’s primary response when inflation increases. Post-COVID, the FED consistently raised the federal funds rate almost every chance it had.

The FED raises rates as a measure to combat inflation. The Fed issues rate hikes when inflation is high to discourage more borrowing. When it’s low, the Fed lowers rates to encourage consumer spending. While the Federal Reserve doesn’t charge interest rates itself, only the federal funds rate, financial institutions generally follow suit.

Which Lenders Have the Best Debt Consolidation Loan Rates?

Start your search now to find the lender with the best debt consolidation loan to meet your needs. Use the curated list below to compare rates, fees, and more.

When Do Fed Rate Hikes Occur? 

The Federal Open Market Committee holds eight regular meetings throughout the year. Sometimes, it convenes for additional meetings as needed. During these meetings, the FOMC adjusts the federal funds rate, as necessary, based on economic conditions. The Federal Reserve releases the FOMC meeting minutes three weeks later.

How Do Interest Rate Hikes Impact Consumers? 

After the Federal Reserve raises and lowers the federal funds rate, banks, lenders, and other financial institutions are usually quick to do the same. Fed rate hikes primarily affect consumers in two ways:

Interest Rate Increases on Deposit Accounts

The rate you earn on interest-bearing accounts like savings accounts, CDs, and money market accounts will likely increase after the Fed raises rates. When banks increase your APY, you earn more money on your account balance.

Interest Rates Increase on Lending Products 

After Fed rate hikes, banks and lenders usually raise interest rates on select products, making it more expensive to borrow money. This doesn’t affect existing loans with fixed interest rates, such as your mortgage or student loans, but it does affect any loans or accounts with variable interest rates, including credit cards.

Interest rates determine how much you’ll pay in interest charges if you carry a balance on your credit card. If you pay your card balance in full each month, you don’t have to worry about paying interest on card purchases. If you keep a large balance or have multiple credit cards with balances, rate hikes can make paying off those cards more challenging.

The time it takes to pay off your credit card and the total interest you’ll pay varies considerably depending on your interest rate and monthly payment amounts. Let’s say you have a card balance of $10,000. Let’s look at four scenarios to see what credit card payoff may look like at different interest rates and payment amounts.

As you can see, your interest rate and payment amounts play an enormous role in debt payoff for credit cards. The hypothetical scenarios above assume you will make consistent payments and won’t make additional purchases on your card for over two years. If that’s not the case, debt payoff can be even more expensive and time-consuming. And if you have multiple balances to pay off, the problem is even more problematic.

What Can Consumers Carrying a Credit Card Balance Do?

Carrying credit card debt month to month can be expensive. It’s even more so when interest rates are on the rise. Here are several ways you can tackle existing credit card debt.

Use A Debt Consolidation Loan To Pay Off Credit Cards

Another option is to get a debt consolidation loan. You may qualify for a low-interest debt consolidation loan with good credit. You can still be eligible for a debt consolidation loan with bad credit, but the lender may limit how much you can borrow. With bad credit, you could receive a rate more in line with a credit card or higher, depending on the lender. The good news is many lenders allow you to check rates or prequalify for a personal loan without negatively impacting your credit score. By shopping around, you can see if you qualify for a loan and the rates you might be eligible for if you apply.

Pros

  • You may qualify for a lower interest rate than your credit cards
  • Your monthly payment might drop
  • Few bills to manage each month
  • There’s a set end date for loan payoff

Cons

  • Requires meeting credit and other lender requirements
  • You may not qualify for a low interest rate
  • You may pay a loan origination fee

Why It Makes Sense

debt consolidation loan allows you to hold onto your savings while making monthly payments at a much lower interest rate than your credit card. Using one of the credit card scenarios from the previous table, let’s compare the payoff between a credit card and a debt consolidation loan using our personal loan calculator.

Loan interest rates vary based on the lender and underwriting requirements. Personal loan rates average are generally 7% lower than credit card rates for the same borrower. For example, a personal loan with a rate of 15.77% APR leaves you with a monthly payment only a few dollars higher than the credit card, but it would save you $4,407.51 in interest charges over the repayment period. Also, you would shorten debt repayment by 16 months. Not only is repayment shorter, but debt consolidation loans come with set terms, meaning you know exactly when you will pay off your debt.

Not only does a debt consolidation loan not empty your savings account, but it could be a better option if you don’t qualify for a 0% APR card or have extra money each month to put towards your card bill. And if you’re only able to make minimum payments, repayment can take decades to complete.

Pay It Off

The best way to avoid expensive interest charges is to pay off your credit card balance. Depending on your debt, it might take several months or years to pay off card balances fully. Paying more than the minimum required payment each month can shorten the time it takes to pay off your credit cards.

Several debt payoff strategies exist, including the debt snowball and debt avalanche methods. The best payoff strategy often depends on your situation and your cards’ interest rates and balances.

Pros

  • You will get rid of high-interest debt
  • No more interest charges
  • Improve your credit utilization ratio

Cons

  • It can take a long time to pay off if you have excessive card debt
  • It uses up part or all of your extra funds each month

Why It Makes Sense

Credit cards usually have much higher interest rates compared to other lending products. Paying off your cards allows you to avoid those costly interest charges you’ve racked up. By paying down your card balances, you lower your credit utilization, one of the primary factors in determining credit scores.

Take Money From Savings To Pay It Off

If you already have funds in a savings or other account, tapping into them can speed up the card balance payoff process. Using funds earmarked for other goals or needs, like an emergency fund, isn’t ideal, but neither is carrying high credit card balances.

Pros

  • You can pay off debt quicker
  • You’ll avoid ongoing interest charges
  • The funds are already available

Cons

  • It uses money potentially earmarked for other needs
  • You’ll have to build up savings again

Why It Makes Sense

Using existing savings to pay off card balances means no longer being bombarded with interest charges each month you carry over a balance. If you set aside your savings for another need, you’ll have to build it back up, but the interest rate you’re earning on those funds is probably far lower than what you’re paying each month to keep a balance on your cards.

Transfer Balance To A 0% APR Card

If you have existing credit card debt, you could save money by transferring your balance to a 0% APR card. Balance transfer credit cards often come with introductory periods of 0% APR on transfers, sometimes up to 18 months or longer. That doesn’t mean there isn’t a cost. Credit card issuers often charge balance transfer fees, typically a percentage of the total amount transferred. Compare what you would pay under your current card’s interest rate to the total fees you would pay with a balance transfer to see if a 0% APR card is worth it.

Pros

  • An extended period of 0% APR to pay off your balance
  • You can consolidate multiple card balances into one card

Cons

  • Card issuers typically charge a fee on balance transfers
  • You must meet credit and other requirements to qualify
  • You could end up paying more interest if you fail to pay off your balance before the intro period ends

Why It Makes Sense

Paying off debt at 0% interest allows you to regain your footing and pay down your balance without the added stress of continuous interest charges. Without interest charges, your balance won’t grow even if it takes a while to repay the entire balance. Just make sure you pay off the whole balance before the end of the introductory period, or you will pay interest on the remaining amount.

The Bottom Line

Federal Reserve rate hikes have a direct influence on credit card interest rates. When these rates rise, it’s crucial for consumers to take proactive steps in managing their credit card debt.

Options such as debt consolidation, balance transfers, and increased payments can make a significant difference in reducing the financial burden.

Choosing the right strategy depends on individual circumstances and financial goals.

By understanding the dynamics of these rate hikes and taking appropriate actions, individuals can avoid the pitfalls of high-interest debt and achieve greater financial stability in the long run.

About Author
Kevin Payne
Kevin Payne is a freelance writer specializing in credit cards, student loans, personal finance, and travel. He is a regular contributor to Forbes, Student Loan Planner, FinanceBuzz, and Club Thrifty. His work has also been seen on sites such as The Ascent, Credit Karma, and Millennial Money. Kevin is the budget and family travel expert behind FamilyMoneyAdventure.com.