Credit Card Interest Rates Remain at Record Highs. Here’s Why

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Americans pay an average of 22% interest on their credit cards. Here’s how to start paying your credit card debt down. 

Americans are having a tough time with credit cards right now. The latest Federal Reserve data shows that credit card interest rates have hit a record-high average of 22%.

To put that percentage in perspective, Americans were paying just 12.7% in credit card interest a decade ago and 15.5% five years ago. And the recent spike is causing some severe financial hardship for some people.

The collective credit card debt for all Americans is a record $1 trillion.

Here’s why you’re paying so much interest each month and a few suggestions for eliminating your credit card debt.

Why are credit card interest rates so high?

The answer to this question probably won’t surprise you. Credit card interest rates are so high because the Federal Reserve has hiked the federal funds rate rapidly and aggressively over the past two years.

The federal funds rate is the rate at which banks lend money to each other, and when that rate goes up, banks then raise the rates on the services they offer. This is why, in addition to soaring credit card interest, mortgage and personal loan interest rates have skyrocketed as well.

The Federal Reserve is trying to tamp down inflation and uses interest rate increases as one of its key tools for doing that. And considering that the economy has been remarkably resilient so far, it’s unlikely the Fed will lower rates soon.

What to do if your credit card debt is getting out of control

There are 70 million more credit card accounts open in the U.S. right now than there were back in 2019, according to the Federal Reserve. This means more Americans than ever are likely looking for ways to help manage their credit card debt.

Here are a few tips for both managing your monthly payments and how to start getting out of debt:

Stop using your credit card: I won’t get creativity points for this suggestion, but it’s one of the best ways to get your finances back on track. I’ve cut down on my credit card usage lately, and the more debt you have, the more important it is to stop using your card.Pay off your balance every month: To avoid paying interest on your credit card, you need to pay off the balance every month. If you can’t do that, try to figure out how much you can pay above the minimum payment amount.Create a budget: I’ve never encountered anyone who likes budgeting, so you’re in good company if you don’t want to do this. However, using a budgeting app makes this process easier. Your goal is to find potential areas where you can cut back on spending or at least learn where your money is going every month so you can manage it better. You may be able to carve out more money to send to your credit card debt this way.Consider a balance transfer card: This may not be the right move for everyone, but transferring your balance to a new card with a 0% interest rate could be a good option for some people. Just make sure to start paying down your balance immediately to take advantage of the low introductory rate.

If you find yourself too far in credit card debt and need to come up with a totally different approach, then you may want to consider a debt consolidation loan. These loans can combine your debt together into one payment, typically with a lower interest rate than your credit card, and make it easier to make monthly payments.

As with taking out any type of loan, you should consider the loan terms, how long you’ll have to repay it, what the interest rate will be, and if you can afford the monthly payment.

And if you need some extra help in getting started, here’s a guide for how to get out of credit card debt.

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