Will lower interest rates help you escape credit card debt? Experts say no — but you still have options

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• The Federal Reserve lowered federal interest rates by 50 basis points, or 0.5%, on September 18. 
• However, Fed rate cuts won't be large enough to significantly lower high-interest credit card debt.
• Four financial experts share debt management advice, such as negotiating lower interest rates.

The Federal Reserve lowered interest rates by 50 basis points on September 18, leading many would-be homebuyers to wondr if now is the right time to buy a house. Two more rate cuts are expected before 2024 ends.

But what do these interest rate dips mean for those who are looking to consolidate debt or fund emergency expenses with a personal loan or credit card? Not much will change, according to four financial experts we spoke with — your game plan should still be to pay down debt as quickly as possible at the lowest interest rate you can secure.

A national debt crisis

Americans are facing a credit card debt crisis, with millennials and Gen Z at the forefront of the struggle. U.S. households collectively carried $1.15 trillion of credit card debt in the first quarter of 2024, according to Federal Reserve data released on average American debt statistics. 

The average credit card interest rate is north of 20%, making paying down high-interest debt particularly challenging. Yet carrying an outstanding balance can cost more than $1,100 a year, especially if you incur late payment fees. 

Four financial experts shared insights on quickly recovering from debt, regardless of your financial profile. Here's what they recommend:

Consolidate your debt

"Debt management strategies vary significantly across borrower tiers, and understanding these distinctions is essential," said James McCarthy, a founding member of the government agency Consumer Financial Protection Bureau (CFPB). In other words, your creditworthiness has a lot to do with the options available to you.

If you're a consumer with average credit who tends to carry a credit card balance, McCarthy recommends seeking options for lower-interest repayment. A debt consolidation loan is a type of personal loan that consolidates your credit card debt under a lower interest rate to provide some financial relief. 

It's challenging to get a competitive rate on a debt consolidation loan if you have a bad credit score, but it isn't impossible, McCarthy said: "The key lies in demonstrating financial stability."

Some lenders consider other factors beyond credit to determine timely rent and utility payments, and borrowers who show consistent income and lower their credit utilization ratio may qualify for better rates.

This week, the average personal loan interest rate hovers around the 21% mark if you have excellent credit. But it's significantly higher if your credit score is in the good, fair, or poor range.

The Fed's interest rate cut will slightly lower personal loan interest rates, regardless of your credit score. But don't expect big dips: The drop is just 50 basis points, or 0.5%, which is negligible in the grander scheme of compounding interest. 

Prioritize paying off debt (even before investing)

"If you are struggling with paying off debt, the way to get out is to pay off the principal as quickly as possible," said Jeremy Schneider, a personal finance educator who co-founded flat-fee financial advice marketplace Nectarine. "Getting out of debt is really about making a plan and staying focused."

Schneider recommends the "snowball" method for getting out of debt. "Sort all your debts from smallest to largest, make minimum payments on everything except the smallest, and throw all the cash you can at the smallest debt," he told Business Insider. "Once that is paid off, you have one fewer payment to make, which can be applied to the next smallest debt and down the line." 

Schneider also cautioned against relying on lower-interest financial tools to solve the problem: "A consolidation loan won't save you from your debt. It's just pushing peas around the plate."

Instead, Schneider recommends that consumers build healthier financial habits, such as treating credit cards like debit cards by paying them off in full each month. "If you can't commit to that, don't use a credit card at all," he said.   

Seek zero-interest financing, if possible

"Many people think credit card debt is normal, so there's not an urgency to pay it off," said Sophia Bera Daigle, a Certified Financial Planner and founder of millennial-focused financial planning firm Gen Y Planning. "But once you're in a cycle of having credit card debt, it can take a lot of time, hard work, and focus to pay it off."

If you have excellent credit or good credit, Daigle recommends transferring your debt to a zero-interest balance transfer credit card and paying it off over time without incurring additional interest. You can also consider a balance transfer business credit card with 0% intro APR if your company needs a financial lifeline. 

Daigle also suggests contacting the National Foundation for Credit Counseling (NFCC) to set up a debt management plan. This non-profit provides access to certified credit counselors who can help you set up a consistent monthly repayment amount. The NFCC also offers online courses in money management to boost your financial literacy.

Understand the true cost of high-interest debt

Once you've gotten out of credit card debt, it's important to build healthy habits to ensure you stay out of debt. 

"Interest rates make a real difference, and it's important to know what you're paying," said Mark Elliot, chief customer officer of financial services company LendingClub. "Many consumers struggling with high-interest debt have expressed confusion surrounding credit card APRs, and credit card companies are happy to keep it that way."

Elliot, who has previous leadership experience at JPMorgan Chase and Capital One, also referenced a common misconception among everyday consumers.

"Many consumers believe that making the minimum payment is an effective way to manage their credit card debt," Elliot said. However, he cautions that only paying the bare minimum on credit card balances can "lead to prolonged repayment periods and significantly more interest paid overtime." Instead, consumers struggling with high credit card debt should focus on developing financial literacy and stick with a spending budget.

A final word of advice: "Developing a repayment strategy is key," Elliot said. "Aim to pay more than the minimum payment to reduce the principal balance faster, and prioritize high-interest debt."