A perfect storm is brewing for credit card holders right now. Record inflation means that absolutely everything is more expensive. As a result, more consumers are seeing their credit card balances balloon. This has led to even people who never carried a balance before finding that they’re struggling to pay their bill in full each month.
At the same time, many cardholders are seeing their credit card interest rates creep up in line with the Federal Reserve’s recent rate increases. Translation: Interest payments are gobbling up a bigger share of credit card balances.
Indeed, credit card debt surged by $46 billion from April to June 2022 — a record 13% jump from the prior year, according to data from the Federal Reserve Bank of New York. If you’re one of the cardholders who can’t pay credit card debt in full, here are five steps you can take to address it.
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Step 1: Check your Credit Card Interest Rate
If you haven’t carried a credit card balance before, you may not be aware of what interest rate your credit card is charging. But it’s important to know exactly how much you’re getting charged so if you need to, you can budget for interest expense as well as your purchases.
The average credit card interest rate for the second quarter of 2022 was 18.89%, according to WalletHub’s Credit Card Landscape study published in July. (Depending on what type of credit card you have, your credit score, and your credit history, you may have a higher or lower interest rate than the average.)
With interest rates this high, it can be a real financial setback to carry a balance for an extended length of time, making only the minimum credit card payment. You may find that you are only paying interest and making little headway in paying off what you actually spent.
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Step 2: Understand How Your Grace Period Works
If you pay your credit card statement balance in full by the due date, a credit card grace period will usually take effect for the next billing cycle. That means you won’t owe interest on new purchases until the due date for the next billing cycle. If you pay that statement balance in full by the next due date, the grace period will continue into the next cycle, and on and on.
But, if you make only the minimum payment or a partial payment on the full statement balance by the due date, you’ll get charged interest on the remaining balance and lose your grace period for the next billing cycle. This means you’ll owe interest on any purchase immediately. Even if you go back to paying the full balance, your grace period may not renew for several more cycles, depending on the specific terms of your credit card.
If you’re in a position where you can’t pay credit card bills and must move to partial payments, make sure you’re aware of the additional interest expense you’ll incur on the remaining balance. Try your best to stop making new purchases with that card since interest will be charged on those purchases immediately.
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Step 3: Look at Changing Your Due Date
If you’re feeling overwhelmed because many of your bills are due at the same time, talk to your credit card company about changing your due date. You might be able to move your credit card due date to a day of the month that works better for your budget, so the payments you owe are a bit more staggered.
While this switch might not help immediately to pay down credit card debt, it could offer some relief in the long run.
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Step 4: Explore Ways to Pay Off Your Balance Faster
You may find that with higher interest rates and inflationary spending, you need a more efficient way to pay off your credit card debt, such as by refinancing credit card debt. Luckily, there are some options for how to pay off credit card debt, though keep in mind the best way to pay off credit card debt will depend on your financial specifics.
Balance transfer credit cards that offer a limited time low or sometimes even 0% interest rate can help — especially if you think you can pay the balance in full during the promotional low-rate period.
Another option you might consider is applying for a low-interest personal loan to pay off credit card debt in full. This could help you secure a lower interest rate, and by consolidating your credit card debt, you’d have fewer due dates to keep track of. Keep in mind, however, that there are pros and cons of personal loans to pay off credit card debt.
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Step 5: Consider Using a Budgeting Tool
Higher prices on everything from gas to groceries, plus higher interest rates, can make it harder than ever to make your credit card payments. That’s a signal it’s time to take a close look at your spending, perhaps with the help of one of the many online budgeting tools available.
Personal finance tools can help you understand just how much your cost of living has risen in recent months and make it easier to flag places you can cut back. Some can help to pinpoint fees you may be paying unwittingly or the automatic payments you’re making on your credit card that could get trimmed. Cutting these costs can then make it easier to pay off credit card debt.
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The Takeaway
Runaway inflation and high interest rates are big contributors to ballooning credit card balances. If you’re struggling with a larger balance, understanding how credit cards work as well as taking steps to pay off credit card debt faster and budget smarter can help.
Using credit cards wisely can be a helpful weapon in the battle against higher prices and skyrocketing interest rates. The SoFi Credit Card offers unlimited 2% cash back on all eligible purchases. There are no spending categories or reward caps to worry about.1
Photo credit: iStock/Sneksy
1Members earn 2 rewards points for every dollar spent on eligible purchases. If you elect to redeem points for cash deposited into your SoFi Checking or Savings account, SoFi Money® account, or fractional shares in your SoFi Active Invest account, or as a payment to your SoFi Personal, Private Student, or Student Loan Refinance, your points will redeem at a rate of 1 cent per every point. If you elect to redeem points as a statement credit to your SoFi Credit Card account, your points will redeem at a rate of 0.5 cents per every point. For more details please visit SoFi.com/card/rewards. Brokerage and Active investing products offered through SoFi Securities LLC, member FINRA/SIPC. SoFi Securities LLC is an affiliate of SoFi Bank, N.A.
1See Rewards Details at SoFi.com/card/rewards.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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