We’re seeing higher interest rates on loans of all types these days, but at least with a personal loan or a home equity loan, you’re signing on to pay a fixed interest rate on the money you borrow (meaning your payments will be the same and you’re not running a risk of seeing them spike and become unaffordable). The same cannot be said of variable-interest debt like that on a credit card, however. Right now is a particularly bad time to have credit card debt.
If you have revolving balances on your credit cards, you might be wondering if your debt will get cheaper in 2024. It certainly could, in terms of your credit card’s APR. But even if we see lower interest rates thanks to the actions of the Federal Reserve, having credit card debt is never really affordable. Let’s take a closer look to see why.
Your payments could get cheaper if the Fed lowers rates
As of this writing, the average credit card APR is 27.80%, according to Forbes. Contrast that with data from the Federal Reserve Bank of St. Louis, which found an average credit card APR of 19.07% just a year ago in November 2022. What accounts for this spike? We have the Federal Reserve to thank.
The Federal Reserve sets the benchmark interest rate (also known as the federal funds rate), and this is the rate at which banks lend money to each other. It also impacts consumer borrowing rates — if banks have to pay more, you have to pay more to borrow from them.
Between last year and this year, we’ve seen 11 rate hikes, and the federal funds rate is at its highest level in four decades. Rate hikes are the Federal Reserve’s way to cope with inflation, which also soared last year. If borrowing money is more expensive, fewer people will borrow and spend beyond their means, which should ease inflation.
Rates have remained at the same level since July 2023, however. The Federal Reserve elected not to raise rates at its last two meetings. It still has one more meeting in 2023, and a full slate for next year. It’s conceivable that it will start lowering the federal funds rate in the near future, perhaps in 2024. If this happens, then your credit card’s APR could be lowered and your payments could end up cheaper as a result.
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Having credit card debt is still expensive
It’s important to note that it’s never really a good time to have high-interest debt. Credit cards make it easy to spend beyond your means, and once you’re in debt, it can take a long time to climb out, especially if you’re only making the minimum payments owed on your cards.
If you’re wondering about the cost of your debt in 2024 or beyond, it’s a sign that it’s time to start making moves to pay off your debt and be done with it. Here’s what to focus on.
Make a plan
You have options to deal with your debt. The debt snowball is one method — you make minimum payments on all but your lowest balance and aim to send as much money as you can to that debt, paying it off quickly. I used this technique in 2022, and it went much faster than I expected, perhaps due to the high level of motivation I found from knocking out my smallest balances first.
The debt avalanche is another method you could try, and it’ll save you more money than snowballing your debt. In this technique, you focus on paying off your highest-interest debt first, rather than your smallest balance.
You can’t budget your way out of this
If you don’t have a lot of extra income to send toward your credit cards, you will likely have far more success increasing your income than trying to cut all the fun out of your life. See if you can get a raise at your main job, or pick up a side hustle. Extra earnings aren’t already a part of your budget, so you can send all the money you make from your side gig to your debt.
Consider consolidating your debt
If you feel confident that you can drill down and pay off your debt in a set period, you might want to consolidate it. One way to do this is via a debt consolidation loan, which will give you set payments over a period of time (usually two to seven years).
If you have good credit, another option is to apply for a balance transfer credit card. You’ll have to pay a small balance transfer fee (often 3% to 5%), but once your old balances are moved to the new card, you could have as long as 21 months with 0% APR. If you divide your balances owed by the number of months you have at 0%, you’ll know how much to pay per month to be free of debt.
Credit card debt is never cheap, regardless of what the Federal Reserve is up to. Focus on the above moves to get clear of your credit card debt once and for all.
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