Three tips to pay off credit card debt as interest rates rise

Highlights

The recent pick-up in consumer prices has led to a rise in interest rates.

On Tuesday, the RBA board decided to lift the official cash rate target by 50 basis points to 0.85%.

In such a scenario, credit cardholders should be cautious and work on lowering their debt as soon as possible.

Central banks across the world are on a rate hike spree as inflation touches new heights with each passing month. The latest to increase interest rates was the Reserve Bank of Australia (RBA), which on 7 June 2022, announced its biggest single rise in the cash rate in over two decades. On Tuesday, the RBA’s board decided to lift the official cash rate target by 50 basis points to 0.85%.

Rate hikes by central banks are generally accompanied by similar hikes from banks, which pass on the increased cost of borrowing to customers. The latest increase may come as a surprise for many because a lot of borrowers have never seen such a steep rate increase of late.

Will this rate hike negatively impact credit card holders? Well, it’s still to be seen how banks move ahead. But having a sizeable credit card debt is not considered ideal, especially amid rate hikes. Experts advise borrowers to pay off credit card debt and consolidate their home loans. While there is no quick-fix solution to get out of the credit card debt in one go, a combination of smart money moves can reduce your loan.

Here, we discuss three strategies for paying off credit card debt in a smart way:

The snowball method

The snowball method is about paying your debts from the smallest to the biggest. You can start with paying off your smallest debt first, irrespective of the interest rate. It can encourage you to pay the debt with the highest balance. The snowball method can create momentum that pushes you to pay off multiple debts. So, the snowball method can motivate you to clear your debts in a timely manner.

Avalanche method

The avalanche strategy encourages credit card borrowers to start with the highest debt and then move to the smallest. If you can, say, budget AU$500 each month to pay off debt, you would first use the bulk of these funds to pay off the highest-interest rate debt. Once it is done, you can employ your funds to the next highest interest rate loan.

Cashbacks and points can wait

Credit card users earn cashbacks on everyday purchases. These points can be redeemed to buy new accessories or trips. However, if you are already carrying a huge balance on your credit card and are incurring expenses for the sake of earning points, you must stop immediately.

You should clearly understand that any point or cashback earned gets easily wiped out if you can’t afford to pay for your purchases in cash when your statement is due.

In case, you are a habitual offender and spend more than you earn, stop using your credit card and switch to cash or a debit card.