With credit card interest rates at record highs, these 4 tips can help debtors beat the ‘brutal’ minimum payment cycle

The Covid-19 pandemic separated the haves from the have-nots when it comes to finances.

Research shows that trend is continuing when it comes to debt, particularly credit cards.

More than one-third of Americans — 35% — say they are carrying their highest level of debt ever or close to it, according to a Northwestern Mutual survey of 2,740 adults.

The top source of personal debt, excluding mortgages, is credit card debt, with 28% of respondents, the research found.

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On the other hand, 43% of adults with personal debt say those balances are at their lowest level ever or close to it.

The results reflect the aftermath of the Covid-19 pandemic that posed financial challenges for some, such as reduced or lost employment, and reduced financial pressures for others, with lower mortgage rates and the pause of federal student loan payments, noted Alap Patel, a Chicago-based wealth management advisor at Northwestern Mutual.

“We were all in the same storm, but not everyone was in the same ship,” Patel said.

With federal student loan payments set to restart in October, credit card balances also pose a big risk for some individuals and households, according to Ted Rossman, senior industry analyst at Bankrate and CreditCards.com.

The average credit card debt is $5,733 per person, according to TransUnion. Notably, Americans have set a record for total credit card debt with $986 billion in the fourth quarter of last year — which held constant in the first quarter, Rossman noted.

“Every other time in the past 20 years, credit card debt fell in the first quarter,” Rossman said

That speaks to the challenges of high inflation and higher interest rates, he said.

“It’s just a tough combination for a lot of people,” Rossman said.

Credit card interest rates now average 20.55% — the highest since Bankrate started tracking them in 1985, he said.

“Credit card rates rose more last year than any other year on record,” Rossman said.

The Federal Reserve is expected to continue to raise interest rates, which would make interest on those debts even more expensive.

Bankrate’s research has found roughly half of credit card holders are paying their credit card bills in full every month, which means they are benefiting from the rewards and buyer protections those accounts offer without compromising their personal bottom lines.

Yet the other half of credit card borrowers are carrying expensive debt that can really add up.

A credit card borrower with the average $5,733 credit card balance at 20.55% will be in debt for over 17 years if they make just the minimum payments every month, according to Rossman.

They will also pay about $8,400 in interest on top of the $5,733 balance, he said.

“The minimum payment math is brutal,” Rossman said.

To shed those balances sooner, these tips can help.

The top tip for credit card debt holders, according to Rossman, is to try to transfer your credit card balance to another card offering a 0% introductory rate, which may last as long as 21 months. “Despite this rising rate environment, these offers remain abundant,” Rossman said. However, you will need good to excellent credit to qualify.

When it comes to paying down credit card debt, two plans are typically popular — the snowball or avalanche methods, noted Patel. The snowball method consists of paying the smallest debts first, while the avalanche approach calls for prioritizing the highest interest rate balances. Alap said he advises his clients to pick the method likely to be the most successful for them.

Even your credit history is not stellar, there are other resources that can help, Rossman said.  Non-profit credit counseling and sources like Money Management International or GreenPath Financial Wellness may help you knock down your interest rate to as low as 7% to 8% over four to five years, Rossman said.

Even as you’re attacking credit card balances or other debts, it’s important to set cash aside, Alap said. An emergency fund with three to six months’ of expenses is ideal. Credit card debt holders should strive for at least two months’ expenses to fall back on in a pinch, he said.