3 Steps to Shrink Your Debt Before Interest Rates Rise

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  • Consumer interest rates could rise this year in light of actions taken by the Federal Reserve.
  • If you owe money on your credit cards, it's a good idea to pay off that debt as quickly as you can.

Make these key moves sooner rather than later.

There's a reason consumers are often urged to favor personal loans over credit cards when a need to borrow money arises. Personal loans allow you to lock in a fixed interest rate on your debt and pay it off in installments over time. Credit cards, on the other hand, let you carry a balance forward, but the interest rate on your debt can change. And if your interest rate climbs, your debt becomes more expensive.

This year, there's reason to believe that consumer borrowing will get more expensive. The Federal Reserve has plans to raise its interest rates multiple times in 2022. And while the Fed doesn't set consumer borrowing rates, it tends to influence them.

That's why now would be a really good time to eliminate or at least reduce the credit card debt you already have. Here's how.

1. Cut back on spending

If you have a credit card balance to knock out, you'll need money to do so. And so now may be a good time to rethink your spending and cut back on expenses that aren't essential. That could mean getting rid of cable, dumping your gym membership, or even being more judicious about how you shop for apparel and food.

2. Get a side hustle

The money in your paychecks may be largely earmarked for essential bills, like your car payment and rent. If that's the case, a side hustle could be your ticket to shrinking your debt quickly. Since the money you earn from that second gig won't be allocated to existing expenses, you should have the option to take all of it, minus what you owe in taxes, and use it to chip away at your balances.

If you're not sure what side hustle is right for you, try experimenting with a few different ones. You can drive for a ride-hailing service for a bit and see if that gives you the income you want. If not, you can look at something different -- perhaps signing up with a grocery delivery app, doing online data entry work from home, or caring for pets while their owners are away.

3. Do a balance transfer

A balance transfer won't reduce the amount you owe on your credit cards -- but it could make it cheaper to pay that debt off. Generally, a balance transfer will allow you to move your existing balances over to a single card with a lower interest rate. In fact, many balance transfer offers come with a 0% introductory APR that lasts for a period of time. And if you're able to avoid accruing more interest on your debt, it should be easier to pay off.

Interest rates could rise in the course of the year, and that could make your credit card balances even more difficult to pay off. It's a good idea to get ahead of interest rate hikes by chipping away at your debt sooner rather than later. And these moves could make it easier to whittle that debt down or, more ideally, pay it off completely.

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