Debt is about to get more expensive: What to do if you’re struggling with payments

U.S. credit card debt recently hit $1.03 trillion  — the highest it’s ever been — as the number of cardholders carrying a balance continues to increase. According to a Bankrate survey, nearly 50 percent of cardholders are carrying debt month-to-month — up from 46 percent last year and 39 percent in 2021.

Credit card debt isn’t a new issue among American consumers. However, cardholders are in for an expensive ride as interest rates continue to rise amid the Fed’s ongoing battle against inflation. If you’re struggling with credit card debt, consolidating your accounts or applying for relief are some options to protect yourself against future rate increases.

Interest rates on credit cards expected to remain high amid rising rate environment

Ever since inflation hit a 40-year high last June, the Fed’s been rising interest rates in an effort to tame it. While these efforts have been paying off, as inflation has slowed down, rate hikes aren’t over. Economists expect that the Fed will follow through with at least one more rate hike before the year ends, which will put the federal funds rate between 5.5 and 5.75 percent. This, in turn, will make borrowing and overall debt more expensive.

Michele Raneri, vice president of U.S. Research and Consulting at TransUnion, says that, when it comes to credit card interest rates, there’s no reason to believe they won’t stay at least as high as they are through the remainder of the year, regardless of credit quality.

“It would not be surprising if we continued to see elevated delinquencies,” Raneri says. “However, in light of the persistently low unemployment we have seen, there is hope that this elevation will be tempered. Additionally, it is a positive sign that utilization has remained relatively low, and consumers are not maxing out their available credit,” she adds.

What this means for consumers

The average APR for new credit cards currently sits below 21 percent — the highest it’s been since mid-2007, according to CreditCards.com. With rates set to increase again this year, cardholders carrying a balance could also face higher monthly bills. This, coupled with higher prices for everyday goods and services, means that consumers may have a harder time paying off their balances, as budgets will remain stretched.

What to do if you’re struggling with credit card debt

If you’re one of the millions of Americans who are struggling with credit card debt and looking for ways to pay it off or make payments more manageable, these are a few options to explore.

• Debt consolidation: Debt consolidation consists of taking out a personal loan to pay off your credit card accounts, resulting in a single payment each month with one fixed interest rate. According to research from TransUnion, credit card debt consolidators saw their balances decrease by 57 percent, on average, after consolidating.
• Debt relief: If you have over $10,000 in credit card debt and imperfect credit, then hiring a third party company to help you get out of debt may be a good option. Debt relief companies settle your debts for less than what you owe in exchange for a fee. This fee is usually between 15 and 25 percent of the amount settled and most consumers are debt-free in under four years.
• Debt management plans: Offered by credit counseling agencies, debt management plans allow you to get out of debt in three to five years. These plans are best for those who are deeply in debt and can’t qualify for debt consolidation loans. Debt management plans are also a more cost-effective alternative to debt relief companies, as some credit counseling agencies are nonprofit organizations.

The bottom line

As interest rates continue to rise, credit card debt will become more expensive. That said, you have options to protect yourself and your finances against further increases. Make sure to research these options carefully, so you can opt for the one that makes the most sense for your situation.