Credit card debt is a well-known problem to consumers in the United States. Oftentimes, many people find themselves dealing with too much debt without much a way of paying it off.
On average, the average American owes nearly $4,300 in credit card debt; furthermore, credit cards have notoriously high interest rates averaging over 17 percent according to CNBC.
High interest rates and high balance can spell disaster to anyone trying to move forward in life. Most consumers cannot afford to let their credit card debt fester. Fortunately, there are ways to deal with credit card debt, whether it’s making additional payments or reducing the interest rate. Here are a few popular methods for paying down credit cards.
Budgeting with the Debt Avalanche Method
If you’re dealing with multiple credit cards, then the debt avalanche method could be a good place to start. This budgeting method can be done out of pocket, and it’s one of the faster ways to self-sufficiently pay off multiple debts. Here’s a bit more info.
List out all your credit card balances and order them by interest rate. Put the higher-rate accounts towards the top of the list. Make minimum payments on all accounts except for the credit card with the highest interest rate. Devote any additional cash to making a larger payment on that account. Keep doing this until it’s paid off. When the first high-rate card is done, repeat the same procedure with the next high-rate credit card on the list.
This method saves money by cutting away at the costliest debt first, and as mentioned, it’s a fast way (relatively speaking) to pay off multiple debts on a budget. It can also be done with your own money. However, this method is best for people with high income because it’s financially demanding. It’s easy to say pay more towards high-rate debt, but it’s not easy in practice.
Alternatively, you could look into the debt snowball method. This is a sister repayment method to debt avalanche. Instead of prioritizing accounts with high interest rates, it prioritizes low-balance accounts.
Consolidating with Personal Loans
Some consumers choose to take out a personal loan, or debt consolidation loan, to pay off multiple credit cards at once. This requires you to submit an application for a new loan with a lender, but it can be an effective solution. Here’s the general idea.
If you have multiple credit cards, you can apply for a personal loan from a private bank or lender; this loan can be used to pay off all credit card balances. Afterwards, you are left to make monthly payments on one loan. It would come with a new interest rate as well as repayment term. In short, you swap out credit card debt and various interest rates with one personal loan debt and one interest rate.
For starters, this makes repayment a bit simpler since one monthly payment replaces several. Another key benefit is getting an interest rate that’s lower than all previous credit card rates. You should be able to save money with a lower rate and reduced interest costs. All of this should help you manage your debt
That is all great news, but there are drawbacks to consider. A lower rate sounds nice, but this can be difficult to secure. Personal loan companies usually offer unsecured personal loans, so they rely heavily on credit score and income when approving applications. Applicants with great to excellent credit and high income are more likely to get low rates, but those who fall below this criteria may not get a low rate – if they qualify at all.
On a final note, consolidating your credit card debt may bring all credit card accounts up to speed, but it doesn’t actually get rid of your debt. You still need to pay back the personal loan. While it may save on interest, you won’t save any money if you miss payments.
Using a Balance Transfer Credit Card
Similar to a debt consolidation loan, you may consider applying for a balance transfer credit card. These credit cards offer low or zero percent interest rates during an introductory period which is usually 6 to 18 months.
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While the debt obligation doesn’t go away, it can save money for similar reasons as a debt consolidation loan. It allows you to pay off debt at a lower interest rate which reduces costs and capitalization. However, it also has a few issues and drawbacks as well.
First, there are costs associated with balance transfers. You must pay a fee which is typically 3 to 5 percent of the balance. Furthermore, if you do not pay off the balance within the introductory period, you must pay higher interest on the credit card debt yet again.
Additionally, a balance transfer card must be obtained through a credit application. Many card providers underwrite using credit scores, income, and credit history. Therefore, a low-credit applicant may not be able to qualify for the enticing low-rate offer or for the card at all.
Summing It Up
Credit card debt seems overwhelming, but cardholders have actionable options. Oftentimes, it’s as simple as implementing a new budget or applying for another form of credit. Whichever option you choose, it’s paramount to plan ahead and think about your future expenses, obligations, and finances. With a proper plan in place, it’s entirely possible to put yourself on track to successful repayment.
Andrew is a Content Associate for Lendedu – a website that helps consumers with their finances. When he’s not working, you can find Andrew hiking, hanging with his cat Colby, or edge guarding in Super Smash Bros.