This Fed pause is the perfect time to pay down your costly, variable-rate debt

The Federal Reserve is pausing its interest rate hike campaign, the central bank announced in its September policy meeting — marking only the second time the Fed has done so since it began raising rates in March 2022. The Fed’s last meeting in July ended with a rate hike that reached a 22-year high.

While the move to hold rates steady in this last meeting was widely expected, how rates will play out the rest of 2023 with two more Fed meetings on the horizon remains unknown. Inflation has certainly cooled, but it’s still high enough that the Fed has signaled the possibility for another rate increase, depending on what economic factors like consumer spending and the job market may show.

For consumers, the Fed taking its foot off the gas serves as a reminder to accelerate paying off your debt before another possible rate increase. And even if rates remain steady for the rest of 2023, that steady level is high enough to make eliminating your costly, variable-rate debt an immediate priority.

When we talk about expensive debt that has variable interest rates (aka rates that can go up or down at any time), the first thing that comes to mind is credit card debt. The average credit card APR is currently over 20%. Any other type of traditional consumer loan doesn’t have a rate close to that.

With the Fed holding its benchmark rate steady right now, it’s likely banks will follow suit and not raise rates for its consumers either. This means that you can get a little break from your credit card interest rate going higher and work on chipping away at your outstanding balance. This doesn’t mean interest will stop accruing, though. You’ll still be collecting interest likely with each day that passes (since most credit card issuers compound interest daily), but hopefully it won’t be at an even higher rate than before the Fed’s September meeting.

Stop interest in its tracks

To put a complete pause on interest accrual, sign up for a balance transfer credit card that offers an introductory period of up to 21 months to pay off your balance interest-free.

Both the Wells Fargo Reflect® Card and the Citi Simplicity® Card offer cardholders 0% intro APR for 21 months from account opening on qualifying balance transfers (after, 18.24%, 24.74%, 29.99% variable APR for the Wells Fargo card and after, 19.24% to 29.99% variable APR for the Citi card). This gives you nearly two years to pay off your balance at zero interest, regardless of what the Fed’s moves are.

With balance transfer cards, make sure you have a plan for how you’re going to pay off your balance before the intro period is up and you have to start paying interest again.

Seek debt settlement

If you’re struggling with overdue bills and can’t see a way out, a debt relief company may be able to help you as a last resort option. While the debt relief company negotiates with your creditors on your behalf, you usually stop making payments on your debt. Instead, you place the money that would have gone toward debt payments into a savings account (preferably a high-yield savings account such as the Marcus by Goldman Sachs High Yield Online Savings), where it sits until you pay the hopefully lower amount your debt relief company and creditors have agreed on.

For credit card debt specifically, we recommend Freedom Debt Relief®, which has a program guarantee that refunds fees if settlement and fees are greater than the amount originally owed when enrolling in the program.

Keep in mind that debt settlement isn’t guaranteed, and it also comes with some potential risks: you can hurt your credit score, end up paying extra fees and/or additional taxes when debts are settled and face possible lawsuits (even when the process works as intended). Make sure you’ve exhausted all your other options for dealing with your debt before turning to a settlement company.

Another costly form of debt with variable interest rates may be private student loans. Whereas federal student loans come with fixed rates, private lenders often offer both fixed and variable interest rates. If you’re a private student loan borrower, check to see what kind of rate you have.

For those with variable rates, the Fed’s current pause on its benchmark rate means that your own rate probably won’t go up just yet. If your credit score has improved since you first took out the student loan from the private lender, consider refinancing to see if your higher score qualifies you for a lower rate. Some of the top student loan refinance companies include SoFi®, Earnest and Citizens Bank.

If you don’t have any high-interest debt to pay off, you can prioritize taking advantage of the high yields many deposit accounts are still offering. Plus, if banks continue to tighten their lending, it may be harder to get credit for the rest of the year. This makes saving all the more important so you don’t need to rely on new credit in the near future.

You can get some of the highest returns on your savings with the top high-yield savings accounts, such as the below:

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every debt and savings article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of debt and savings products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics. See our methodology for more information on how we choose the best credit cards, debt relief companies, student loan lenders and savings accounts.

Catch up on CNBC Select’s in-depth coverage of credit cards, banking and money, and follow us on TikTok, Facebook, Instagram and Twitter to stay up to date.