How to Pay Off High-Interest Debt as Credit Card Interest Rates Reach 20% on Average

According to Greg McBride, chief financial analyst at Bankrate.com, credit card interest rates reached record highs last year and there is still more to come in 2023.

Credit card rates have reached an all-time high of 19% on average, after rising at the steepest annual pace ever. This is in line with the Federal Reserve's interest rate hikes to combat inflation.

As the Federal Reserve continues to raise its benchmark interest rate, credit card annual percentage rates (APRs) will also continue to climb. This is because credit card issuers typically follow the Fed's lead on interest rates. So, if you're carrying a balance on your credit card, be prepared to see your APR go up in the coming months.

According to a recent report, one in five young adults have debt in collections. This means that 63% of Americans are living paycheck to paycheck, which can lead to some risky behaviors. As a result, credit scores are leveling off.

According to McBride, average credit card APRs could reach a new record high of 20.5% by the end of the year if more rate hikes are implemented.

There is a direct connection between the federal funds rate and credit card rates. As the federal funds rate rises, the prime rate does, too, and credit card rates follow suit. Cardholders usually see the impact within a billing cycle or two.

"The key point for current cardholders is that another 1 percentage point rate hike by the Fed will mean your rate will go up by 1 percentage point," McBride said.

McBride advised that the urgency to pay down credit card debt remains. She recommended aggressively paying off the debt to avoid high interest charges.

He said that using a 0% balance transfer card can help boost your efforts, and that you should avoid putting additional purchases on credit cards unless you can pay the balance in full at the end of the month.

There are still plenty of cards offering 15, 18, and even 21 months of interest-free balance transfers, according to credit expert John Ulzheimer. This can be a great way to save on interest and pay down your debt more quickly.

"This gives you a boost to get the debt paid off and protects you from the effect of additional rate hikes that may be coming."

"If you don't take steps to reduce your debt, it will only become more expensive," said Matt Schulz, LendingTree's chief credit analyst.

According to Schulz, making the best use of a balance transfer comes down to making payments on time and aggressively paying down the balance during the introductory period.

If you don't pay the balance off, the remaining balance will have a higher APR applied to it. The average APR for new credit is about 23%.

Additionally, there may be restrictions on how much you can transfer, as well as associated fees. Most cards charge a one-time balance transfer fee, typically ranging from 3% to 5% of the total balance. According to Schulz, this is something to keep in mind when considering a balance transfer.

One late payment can cancel out your no-interest offer.