The average American is carrying $5,313 of credit debt within their wallet.[1] And since the average charge card comes with an rate of interest that ranges from 15% – 25%, that debt can balloon with time.[2]
If you are looking for methods to pay off your high-interest credit debt, consider taking advantage of these popular methods:
- Debt consolidation: Bundle (aka consolidate) multiple charge card balances into a single debt having a single payment per month utilizing a personal bank loan.
- Credit card refinancing: Transfer debt using their company charge cards to some balance transfer credit card by having an introductory low or 0% interest rate.
Both methods are effective – but each includes pros and cons. To find the method that's right for you, you'll need to understand how each one of these works.
Debt Consolidation Having a Personal Loan
With this process, you are taking out financing – usually a personal bank loan – and use it to consolidate and pay off or pay down your credit card balances.
You could possibly get an unsecured loan from the bank, credit union or online lender.
A personal bank loan (that is a kind of installment loan) is really a lump sum payment of money you borrow at a fixed or variable interest rate and agree to repay each month for 1 – 5 years. Or perhaps in lender-speak, 12 – 60 months.
Personal loans is often as big (or as small) as you need these to be, ranging from $1,000 – $100,000. The total amount you're qualified to borrow and also the interest rate you're offered will be different by lender. Your credit rating, income and credit rating will also play a large role in shaping lender offers.
Before you sign up the dotted line, think about the pros and cons of personal loans.
Pros
- Lower interest rates: If your credit is good (more on that in a second), personal loans usually come with competitive interest rates that start at about 9%. That's less than most charge cards, that have rates of interest starting around 14% – 17%.[3]
- Lower payment per month: You might be able to lower your monthly obligations by consolidating your debt into a single payment in a lower rate of interest.
- Easier to handle: Juggling multiple credit card balances could be a time suck, as well as your chance of missing a payment is a lot higher. When you consolidate, there's just one bill to bother with every month.
Cons
- Need good credit to qualify: To qualify for an unsecured loan, you will need a a good credit score background and a credit rating with a minimum of 620. FYI, most lenders should you prefer a credit rating of 670 or higher.[4]
- Fees: Lenders typically charge an origination fee (read: what a lender charges to process a loan). It usually comes down to 1% – 5% of the amount borrowed. Those funds might be deducted from that which you borrowed. Let's say you borrowed $10,000 having a 5% origination fee. You'd get $9,500 in the lender, but you'd repay $10,000.
- Late fees: Pore within the fine print. Lenders may charge additional fees or include a prepayment penalty clause inside your contract. Prepayment charges are triggered when you pay a loan off early.
- Application process: To apply for a personal bank loan, a lender will require your financial info, like bank statements, pay stubs, W-2s, tax returns or other evidence of income.
- Length of your time: You may be capable of getting the loan in One day once you've been approved but processing the borrowed funds might take 7 – Ten days.
Using Your house To Consolidate Charge card Debt
Personal loans are unsecured loans and don't require collateral (aka personal property you allow a lender to obtain a loan).
If you own a house and have enough equity (the current worth of your home without the balance of your loan), you might qualify for a home equity loan or home equity line of credit (HELOC).
Home equity loans and HELOCs are secured personal loans, and your home acts as the collateral. You'll probably obtain a lower interest rate with one of these loans compared to a personal loan, however they might be harder to be eligible for a. The other con is that the application for home equity loans and HELOCs is longer and more involved.
Credit Card Refinancing
If you've got a good credit score, no doubt you've gotten lots of credit card balance transfer offers.
Balance transfer offers have one job: to help you get to enroll in a new credit card (or nudge you to transfer other balances to some card you already have).
One hallmark of balance transfer offers is the low or 0% introductory rate of interest. These tempting but short-term rates usually last for 6 – Two years. Following the intro period, the eye rate spikes to the standard credit card rate of interest, which may be anywhere from 15% – 25%.[2]
If you utilize balance transfer offers strategically, they can be a savvy way to manage your credit card debt – but there are benefits and drawbacks to consider.
Pros
- Low rates of interest: Paying 0% interest can help you save lots of money in the short term. Based on your financial allowance and debt-payoff plan, it might release extra money which you can use to repay other higher-interest debt.
- Easy to use: Trying to get a balance transfer offer can be as simple as filling out a web-based application or talking to a person service rep for a few minutes. There's usually no paperwork required, and your balance transfer is usually processed in 5 – 7 business days.
Cons
- High credit rating: Credit card issuers usually offer balance transfer cards based on credit scores. To get a deal, you will need a credit rating in the high 600s, we're talking 670 or better, and a clean credit rating.[5]
- Short-term offer: The low interest rates on balance transfer offers are here for a great time, but not quite a long time. For those who have a balance following the intro rate expires, you'll be facing higher rates of interest on what's left around the card.
- Low borrowing limit: Your borrowing limit may be the maximum amount you are able to borrow on your card. With a brand new card, the limit probably will not be more than $5,000 – $6,000.[6]
- No same-lender transfers: If you've got a few credit cards from exactly the same bank or charge card company, you probably won't have the ability to transfer balances between those cards.
When Do Refinancing and Consolidation Make Sense?
Refinancing and consolidation can help you manage debt and pay less in interest – but it doesn't get rid of debt.
TBH, whenever you element in balance transfer fees and also the other fees related to loans, you're including for your debt before you decide to post your first payment.
This is why debt consolidation and charge card refinancing perform best as part of a bigger debt management plan.
It's about a lot more than watching individual balances shrink. With a debt plan, you'll need to get organized and have a deep dive to your finances – as well as your spending. Then you'll need to place that intend on paper, creating a sustainable budget that lets you live a little, pay down existing debt and steer clear of adding new debt.
Pro tip: Concentrate on paying down your highest-interest debt first. You'll pay less in interest, and you may make use of the money you saved not paying interest on other bills.
Is Refinancing or Consolidating Credit debt Right for You?
To answer that question, start by asking yourself these questions:
- How much credit debt do I have?
- How much can I commit to reducing credit debt each month?
- How quickly can one pay down my balance? (You'll need the answer to the second question to find this out.)
Let's see what credit card refinancing and debt consolidation would look like should you have had $24,000 indebted across multiple cards.
Credit card refinancing
If you can pay $1,000 a month, you might be better off going with credit card refinancing. You'd pay less in interest during the introductory rate period.
Just ensure that the majority of the total amount gets paid off prior to the balance transfer offer ends. (Remember: these offers usually last 12 – 24 months.)
Debt consolidation
If you are able to pay $500 a month, you may be best having a debt consolidation reduction loan. Why? You could decrease your interest rate by stretches your payments – paying off the loan in about Five years.
You'd pay more in interest, but paying your financial troubles would become more manageable. If you're able to pay more sooner or later, put that extra cash toward the loan and pay it down faster. Just try and avoid triggering fees in case your loan has a prepayment penalty clause.
Refinancing or Consolidation: Don't Do It Alone
Whichever option you select, ensure that it's a part of a larger intend to get rid of debt.
If your debt has you feeling overwhelmed, don't be afraid to inquire about help. Considering contacting a credit counseling service. A counselor can assist you to produce a budget and get your money organized. They might even be in a position to assist you to negotiate a repayment plan together with your credit card issuers.
Point is, most. No matter your debt or financial situation, there is a debt management plan or strategy that will help.
