'Weight off my shoulders': Credit card holders seek debt consolidation for lower interest rates
Ernesto Alvarez paid off about $70,000 of credit card debt in just over a year. The fix: a program that combined his credit card debt into a single payment plan.
Alvarez, 55, said he repaid debt on 12 to 15 different credit cards through a plan with the non-profit, Money Management International, which helped him negotiate lower interest rates and consolidated the debt.
After repaying his debt last year, Alvarez said he and his wife sold their house, moved to an apartment and began saving money for his daughter’s college education.
“Personally, I feel a huge weight off my shoulders,” said Alvarez, who works at a Whole Foods in Newport, California. “It’s a feeling of accomplishment, elation.”
A surge of inflation is squeezing household budgets as many American shoppers weather mounting credit card debt and elevated interest rates. Some cardholders have sought out ways to consolidate their debt, slash their payments and cut down what they owe.
Analysts who spoke to ABC News outlined options such as credit cards that offer a months-long grace period without interest payments, as well as consolidated bank loans with fixed interest payments at comparatively low rates.
The nation’s credit card debt burden drew attention after the Federal Reserve hiked benchmark interest rates last month, since credit card rates typically rise in response to such a move.
Investors peg the chances of another rate increase in October at one in three, meaning credit card rates may face additional upward pressure within weeks, according to CME Group’s FedWatch Tool, a measure of market sentiment.
“People do have more power in this situation than they think,” Matt Schulz, chief credit analyst at LendingTree, told ABC News. “The things that you can do to get your interest rates down can be far more powerful and outweigh any single move the Fed is going to take.”
Total U.S. credit card debt registered at $1.26 trillion in the second quarter of this year, marking an increase of $21 billion from the previous three-month period, a recent New York Federal Reserve study found.
Outstanding credit card balances stand just below an all-time record of $1.28 trillion set in the fourth quarter of last year.
Credit card rates have jumped significantly in recent years. In the second quarter of this year, the average interest rate on all credit card accounts with a commercial bank stood at 20.94%, up from 15.13% at the same time in 2022, Federal Reserve data shows.
Cardholders can avail themselves of widely available financial instruments that consolidate their debt and reduce their payments, some analysts told ABC News.
A 0% balance transfer credit card, for instance, offers an initial interest-free period lasting as long as 15 months before payments take hold, Schulz said.
“A 0% balance transfer credit card is about the best consolidation offer you can get,” Schulz said.
Such credit cards typically carry one-time fees amounting to between 3% and 5% of a customer’s transferred debt, Schulz said. Depending on the amount of debt at issue, the one-time payment can prove steep, Schulz added, but it usually pales in comparison to the savings gained over time from a significantly lower interest rate.
A new credit card at a lower interest rate holds another downside, Schulz said: The temptation to run up more debt.
“It requires some discipline,” Schulz said.
If debt holders find they cannot qualify for the minimum credit score necessary to access a 0% balance transfer credit card, they may be able to secure a personal loan with a favorable interest rate.
Under that approach, a debtholder can take out a bank loan in an amount matching his or her credit card debt and use it to pay off the credit card. The remaining bank loan, in theory, would provide a fixed interest payment at a lower rate than the credit card, offering a measure of predictability and financial relief, Schulz said.
On the other hand, the fixed nature of the interest payments may be unwelcome to some debtholders who prefer the flexibility afforded by many credit cards, Schulz added.
“It can be a positive in a lot of ways because the predictability can be easier to budget for,” Schulz added.
Carol Jones, a hospital recruiter, racked up tens of thousands of dollars in debt after stepping down from a second job and running up travel expenses to attend her stepdaughter’s basketball games, she said.
She said she sought out ways to consolidate her debt and slash her interest rates, knowing the hole would deepen otherwise.
Jones, who lives in Wichita, Kansas, took out two consolidation loans in an attempt to pay off her debt, but she had to use the credit cards again to make ends meet, leaving her unable to fulfill the terms of the consolidated loans, Lara Ceccarelli, a credit counselor with American Financial Solutions, told ABC News.
American Financial then worked with Jones on a debt management plan to modify the interest rates on her credit cards, another option available to debtholders, Ceccarelli said.
Jones took responsibility for her debt, but she said rising prices have exacerbated the difficulty of climbing out of her financial hole.
“It's stressful when everything keeps inflating, and I know I'm going to have to hurry to try to pay this off, or I'm going to continuously just be in debt,” Jones said.
Editor's note: The story has been updated to clarify the terms of Ernesto Alvarez's payment plan.
