Credit card interest rates hit highest level on record
While carrying credit card debt is never advisable, now is a particularly tough time for consumers, with the average interest rate hitting a record high in the first quarter of 2023.
The average credit card interest rate is now 20.92%, which is higher than it's been at any point since the Federal Reserve began tracking annual percentage rates (APRs) in 1994, according to a new study from WalletHub.
For new credit card offers, the average interest rate in the first quarter hit 22.15%, up from 18.32% during the same period a year earlier, according to the study.
This will grow consumers' debt loads, making it even harder for them to pay off outstanding balances, even if they're not adding to their existing debt.
Consider, too, that many low- and even middle-income families are increasingly burdened by inflation, and turning to credit cards to purchase essentials like groceries.
"Taking full advantage"
What's behind the record-high interest rates? APRs have seen steep increases partly because of the Federal Reserve's recent interest rate hikes, which have driven up the cost of borrowing everywhere. But that's not the whole picture.
"The problem is credit card companies are insisting on adding to already high rates," WalletHub analyst Jill Gonzalez told CBS MoneyWatch. "There is no cap on how high credit card interest rates can get, and they're taking full advantage of the situation consumers are in right now."
Many Americans who carry a credit card balance are also unaware of how high their interest rates are. In other words, they don't know how expensive it is to carry that debt. Card companies often advertise the lowest available interest rates, but they're only available to select applicants, based on their credit score.
"If you don't have excellent credit, you might not get approved for the lowest rate. So that's one way the consumer is unknowingly being swindled," Gonzalez added.
With interest rates rising, consumers are "essentially, overnight — without even incurring new debt — owing more," Gonzalez said.
She noted that record-high interest rates highlight the importance of paying down outstanding credit card balances as soon as possible.
Avalanche vs. snowball method
Two popular methods of paying down debts include the so-called avalanche and snowball methods.
The avalanche approach involves paying down the debt that's most expensive to carry first, regardless of the principal amount.
"Say you have three credit cards, and the highest interest rate is 29%. No matter the balance, put any cash on hand toward paying that one off. Then, move on to the next card," Gonzalez said.
Other consumers prefer the snowball method, which involves tackling the smallest amount of debt first, regardless of the interest rate it carries. That can create a feeling of relief sooner, making it easier to follow through on further debt reduction plans.
"So, it's chipping away at the lowest balance first, which provides more immediate gratification," Gonzalez said.
