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- The Federal Reserve will cut federal interest rates in September and could cut them two more times by 2025.
- But the Fed’s rate cuts are unlikely to be large enough to significantly reduce high-interest credit card debt.
- Four financial experts share their advice on managing debt, including negotiating lower interest rates.
The Federal Reserve is widely expected to cut interest rates by 25 basis points this month, leaving many prospective homebuyers wondering whether now is the right time to buy a home.
But what do the expected rate drops mean for people looking to consolidate debt with personal loans or credit cards or cover emergency expenses? Not much will change, according to four financial experts we spoke to. Your strategy should be to pay off your debt as quickly as possible at the lowest interest rate you can secure.
Sovereign debt crisis
Americans are facing a credit card debt crisis, with millennials and Gen Z on the front lines. According to the Federal Reserve’s Average American Debt Statistics data, U.S. households will have $1.15 trillion in total credit card debt in the first quarter of 2024.
Paying off high-interest debt can be especially difficult, with the average credit card interest rate exceeding 20%, but carrying an unpaid balance can cost you more than $1,100 a year, especially if you incur late fees.
Four financial experts shared their insights on how to get out of debt quickly, no matter what your financial situation is. Here are their recommendations:
Consolidate your debts
“Debt management strategies vary widely across borrower classes, so understanding these differences is essential,” said James McCarthy, a founding member of the agency. Consumer Financial Protection Bureau (CFPB). In other words, your creditworthiness has a lot to do with the options available to you.
For consumers with average credit who tend to carry credit card balances, McCarthy recommends looking for low-interest repayment options. A debt consolidation loan is a type of personal loan that consolidates your credit card debt into one at a lower interest rate, easing your financial burden.
If you have a bad credit score, it’s harder to get a competitive rate on a debt consolidation loan, but not impossible, McCarthy says. “The key is to demonstrate your financial stability.”
Some lenders consider factors other than credit to determine whether rent or utility payments are late, and borrowers with a stable income and low credit utilization ratio may qualify for better interest rates.
This week, the average interest rate on a personal loan is around 20% if you have excellent credit, but significantly higher if your credit score is in the good, fair, or poor range.
If the Federal Reserve cuts interest rates as expected, you can expect to see a slight drop in interest rates on personal loans, regardless of your credit score. But don’t expect a huge drop: The maximum expected cut is 25-50 basis points, which is only 0.25% or 0.5%, and negligible in the grand scheme of compound interest.
Prioritize debt repayment (over investment)
“If you’re struggling with debt repayments, the way out is to pay off the principal as quickly as possible,” says Jeremy Schneider, a personal finance educator and co-founder of the subscription financial advice marketplace. Nectarine“The key to getting out of debt is having a plan and staying focused.”
Schneider recommends the “snowball” method of paying off debt: “Sort your debts from smallest to largest, make the minimum payment on everything else, and put as much cash as you can into the smallest debt,” he told Business Insider. “Once you pay that off, you’ve got one less payment to make, which you can then put towards the next smallest debt.”
Schneider also warned against relying on low-interest financing to solve the problem, saying “a refinancing loan doesn’t get you out of debt,” “it just puts the problem on hold.”
Instead, Schneider recommends that consumers develop healthier financial habits, such as treating their credit cards like debit cards and paying them off in full each month, “and if you can’t do that, don’t use credit cards at all.”
Ask for interest-free financing if possible
“Many people think that because credit card debt is normal, there’s no urgency to pay it off,” says Sophia Bella Daigle, a certified financial planner and founder of a financial planning firm that focuses on millennials. Generation Y Planning“But once you’re caught in a cycle of credit card debt, it can take a lot of time, effort and focus to pay it off.”
If you have excellent or good credit, Daigle recommends moving your debt to a no-interest balance transfer credit card and paying it off over time without incurring additional interest.You could also consider a 0% introductory APR balance transfer business credit card if your company needs a financial lifeline.
Daigle also said: National Trust Counseling Foundation Contact the National Federation of Credit Cooperatives (NFCC) to develop a debt management plan. This nonprofit provides access to certified credit counselors who can help you make consistent monthly payments. NFCC also offers online courses on money management to increase financial literacy.
Understanding the true cost of high-interest debt
Once you’ve paid off your credit card debt, it’s important to develop healthy habits to stay out of debt.
“Interest rates make a big difference, so it’s important to know what you’re paying,” said Mark Elliott, chief customer officer at the financial services company. Lending Club“Many consumers struggling with high-interest debt are confused about their credit card APR rates, and credit card companies are content to leave it at that.”
Elliott, who has held leadership positions at JPMorgan Chase and Capital One, also addressed some common misconceptions among consumers.
“Many consumers believe that making the minimum payment is an effective way to manage credit card debt,” Elliott said. But he warns that making only the minimum payment on credit card balances “can lengthen your repayment period and result in significantly more interest payments over time.” Instead, consumers struggling with high credit card debt should focus on cultivating financial literacy and sticking to a spending budget.
A final word of advice: “It’s important to have a repayment strategy,” Elliott says. “Aim to make more than the minimum payment to reduce your principal balance quickly, and prioritize your higher interest rate debts.”