Credit card debt is rising rapidly. Here's how to manage it

Have you felt increasingly overwhelmed by the growing numbers on your monthly credit card bills? Switching to your debit card and paying the minimum payment may not be enough to quickly eliminate the debt.

The recent rise in credit card debt is unprecedented. Between December 2021 and December 2022, total balances jumped by $130 billion, the largest annual increase the Federal Reserve had ever seen.

"It's been a long time since we had any sort of (pandemic) stimulus payment, and a lot of people are feeling that pinch. Because they don't have that help anymore and groceries and medical bills are costing more," said Sara Rathner, a credit card expert at NerdWallet. "We are seeing people turn to their credit cards more to make ends meet."

Meanwhile, the interest on that balance continues to rise. Earlier this month, the Fed increased interest rates by a quarter-point. It was the ninth straight meeting at which they've raised rates.

If you are among the more than a third of Americans saddled by credit card debt, you may be wondering what this means for you — while also hunting for any tips on digging yourself out of a financial hole.

The Inquirer asked financial experts to weigh in on the best ways to manage debt in light of the Fed's continued rate hikes. Here's what they had to said.

As simply as possible, how do the Fed rates affect people with credit card debt?

Bottom line: They increase the amount you owe.

"When the Fed raises rates, most everybody in this country is going to see the interest rate on their credit card increase," LendingTree chief credit analyst Matt Schulz said. "And it's not just going to increase for things they buy in the future, it's also going to increase for what they owe currently."

That's because most credit cards in the U.S. are variable rate, meaning the bank can change the interest rate on them.

"They basically are tied to what the Federal Reserve does," Schulz said. "When the Fed raises rates, the interest rates on the card are going to go up by the same amount usually in the next month or so."

As rates rise, what should people with credit card debt do?

1. Educate yourself. Many people who have credit card debt don't know the basics. Wayne W. Williams, associate professor of accounting at Temple University, recommends users read up on the Consumer Financial Protection Bureau's website at consumerfinance.gov/consumer-tools/credit-cards.

2. Assess your budget. This is particularly important if you haven't looked at it in awhile. Inflation has caused the costs of almost everything to rise, so you may need to make changes to your budget. "It's really important to get a handle on what your expenses really are," Schulz said. "Because once you know that, you can start to make some decisions and prioritize your spending in order to ideally free up your [money] to put toward debt."

3. Stop using your credit card. "If you're making day-to-day purchases, maybe switch to a debit card or cash," Rathner said, with the exception of items for which you want the fraud protections credit cards provide.

4. Find out what your interest rate is. "People don't know their rates on each credit card," Williams said. "Knowing your rate will allow you to call up the credit card company and negotiate."

5. Ask for a lower rate. Seventy percent of people who asked their credit card issuer for lower interest rates last year got one, according to a 2022 LendingTree survey. But many don't know you can call up the company and make this request. "It's something too few people do," Schulz said. "The fact that 70% of people get their way shows it's not just folks with an 800 credit score" who can get lower rates.

6. Try the "snowball" method: John McCafferty, director of financial planning at Edelman Financial Engines, recommends people use this method, which involves paying off their smallest debts first and rolling the money that used to be spent on those into the next-largest debt.

7. Look into a 0% interest balance transfer credit card. Many of these cards offer 0% for between 12 months and two years, though they usually require good credit and come with a fee. Rathner said she recommends this option if you "incurred a large, one-time, unexpected expense" that put you into debt, because "it gives you time to almost put yourself on a payment plan."

8. Consider a personal loan. If you aren't interested in a balance transfer card, or don't have the credit score for one, you also can consolidate your credit card debt into a personal loan. These won't come with a 0% rate, but most will be on a fixed rate, meaning it won't change over time. This will break down your debt into equal payments each month until it is paid off.

What about taking money out of savings to reduce credit card debt?

There is where it gets tricky.

"You have to walk and chew gum," Williams said. "You have to do both," maintaining a cash reserve while paying off debt.

Experts recommend having at least three to six months of expenses in an emergency fund, which Williams acknowledged is "difficult to achieve" for a lot of people. If you're in a dual-income household, though, you can reduce that number to three months.

McCafferty's advice depends on each situation, an individual's job security, and how much they are spending each month on credit card payments and interest. Most decisions, he said, should come down to the effect on cash flow.

"By using cash reserves, how much will this free up?" he said. "How quickly can we replenish the cash reserves?"

Definitely don't drain your savings account to pay of debt.

"Having savings is the best way to break the cycle of debt that people find themselves in," Schulz said. "If you don't have savings when you get that credit card balance down to 0, the next time you have a flat tire or have to take the dog to vet, that charge is going to go on your credit card."

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