What Are Some Common Ways to Manage Credit Card Debt
Throughout the United States, credit card debt is a common financial burden for millions of consumers. According to the latest statistics, total revolving debt equals $1.04 trillion, with the average American carrying just under $6,000 in credit card debt. According to another survey, consumers will even rack up an extra $1,000 in credit card debt just over the holiday season.
Credit card debt is a persistent responsibility for most consumers, and for some, it’s an outright problem.
Although using available credit to cover emergency expenses, finance large purchases, or pick up a monthly bill can be helpful when savings is tight, the eventual cost can far outweigh the convenience. This is because the average interest rate on credit cards keeps inching higher, now at slightly more than 17%.
When a balance is not paid in full each month, interest charges add up quickly on credit card debt. For many, this makes it feel as though there is no way out, particularly when only minimum payments are made each month. However, there are several ways you can get on the path toward eliminating credit card debt for good.
Consolidate Credit Card Debt with a Personal Loan
A personal loan can be an effective tool in paying off credit card debt as it provides you with a fixed lump sum that can be used to pay off existing balance. In exchange for the loan, you have a fixed interest rate and fixed monthly payments for several months to several years. A personal loan comes with a scheduled end to repayment, and in many cases, a reduced cost by way of a lower interest rate.
However, you have to be able to qualify for a personal loan with strong credit and income; only applicants with exceptional credit are eligibile for the most competitive rates. Furthermore, it’s important to have a budget plan in place regarding monthly payments moving forward. It is also necessary to keep your credit cards paid off so you don’t end up with more debt than you started.
Pay It Off Using Home Equity
Using a home equity loan can be beneficial in getting rid of revolving debts. Here’s how it works. Homeowners who have equity in their home can apply for a home equity loan that offers a lump sum up front as well as fixed principal and interest payments for an extended period. The interest rates on home equity loans are often lower than credit cards, and you have a set monthly payment that has a set end date. Similar rules apply to a home equity loan as a personal loan. You need to be able to afford the loan payments and be committed to keeping the old credit card balances at zero.
Also, you need to be able to qualify for a home equity loan based on the equity in your property and your credit score. It’s important to understand you are using your home as collateral for this type of debt repayment, so consider the consequences if you cannot make payments in the future.
Move Debt to a Balance Transfer Card
A balance transfer card may also be an option for some borrowers. With a balance transfer, a credit card company offers you a low or no interest promotion that lasts for a set number of months, typically ranging from 12 to 18 months. During this time, no interest accrues on the balance you transfer from another card or cards. You can save a significant amount by completing a balance transfer, but there are things to consider.
The promotional period only lasts so long, and if the balance isn’t repaid in full during that time, you could be hit with an interest charge. Also, balance transfers often come at a cost, ranging from 1 to 5% of the transferred amount. Picking up an additional card could also have an impact on your credit, which is something to watch out for.
Debt Avalance Method
With the debt avalanche method, you list out all your credit card balances owed starting with the highest interest rate card at the top. While paying the minimum on all other cards, you put extra funds toward the high-interest rate debt until it is paid in full. Once that is complete, you roll your extra payment into the next highest card, continuing to pay the minimum on the remaining. The debt avalanche method helps you save on interest charges each month. However, this method works best for those with multiple credit card balances to pay and extra cash on hand to put toward debt repayment each month.
Debt Snowball Method
The debt snowball method works differently than the debt avalanche strategy but with the same concept in mind. In listing out all your debts, you start with the lowest balance at the top, and put the extra cash you have toward debt repayment here first. The other cards receive only the minimum payment. This creates a mindset shift as you pay off one card, then the next, and the next. The momentum can be motivating, but you don’t necessarily save on interest charges following this method. Like the avalanche strategy, you need to have multiple debts for this to work, and surplus funds to put toward your credit cards each month.
The Bottom Line
Managing credit card debt repayment can be a challenge, especially if you don’t have a plan in place. Fortunately, any one of the methods listed above can be helpful in saving you money on your debt repayment, speeding up the time it takes to do so, or a combination of the two.
Be sure to consider your willingness to keep credit card balances at a level you can pay off each month once you start a debt repayment plan, and think through the available funds you have to pay off a loan, balance transfer, or debt plan moving forward. Taking these steps will ensure your work toward credit card payoff is worth it in the end.
By Andrew from LendEDU – a consumer education website and personal finance resource. Check out the blog sometime if you’d like to learn a bit more about finance!