Create a Customized Plan to Get Rid of Credit Card Debt – Fast and with Less Interest
Read on and answer a couple of quick questions to find the best strategy to paying off your credit card debt – customized to your particular situation.
Are you a home owner?
If so – your best strategy is likely going to be to consolidate your card debt into a home equity loan. Home prices have spiked in most parts of the country, opening up value that most folks haven’t tapped yet.
Pros: Ultra-cheap interest rates (often as low as 3.5%) plus the possibility to repay over a longer time period = very low monthly payments. Most people will also be able to deduct the interest paid on a home equity line for tax purposes, saving even more money.
Cons: Only available to homeowners. Generally, only worth it for those who have large amounts of debt to repay.
Example: If you have $10,000 in card debt at 18%, your monthly interest bill would be $150. Consolidating that into a home equity line would lower that to about $30/month, with possible tax deductions dropping it even further.
Conclusion: If you have sizable credit card debt and are a home owner, consolidating to a home equity loan is definitely something we recommend learning more about.
Do you have more than $5,000 in credit card debt (but are not a home owner)?
If this describes your situation, consider consolidating your card debt to a personal loan.
Pros: This takes all your card debt and converts it to a single monthly payment (usually at a significantly lower interest rate). It also sets a date at which you will be free of the debt – normally 3 to 5 years (depending on your selection). Doing this normally boosts your credit score – reducing your “revolving credit utilization rate” (try saying that three times!) while also creating repayment history on the new loan as you make your payments.
Cons: If you have good credit, the interest rate can be as low as 3.49%, but if you have poor credit, or are seriously behind on your card payments, the rates you’ll see may be the same or higher than your cards are charging you. Some folks don’t mind paying the same rate as they pay on their cards in order to get the benefits listed above. (credit boost, debt-free date and consolidation into one payment)
Example: If you have three card balances of $4,000 each, at 18%, you’d be paying $180 a month in interest, while making no headway toward getting out of debt. Consolidating to a 5 year personal loan at 5.99% would mean you had a monthly payment of $232, (interest and principal) and be completely paid off in 5 years.
Conclusion: If you have average and above credit, consolidating larger credit card balances to a personal loan can be a very smart financial move, and provide the peace of mind of having a date you can circle on your calendar when you’ll be debt free.
Do you have between $3,000 and $8,000 in card debt?
If you have a more moderate amount of debt, we highly recommend you look into transferring those balances to a card offering a 0% introductory APR. This means the card offers a promotional period (as long as 21 months!) during which the card will not charge you interest on any balance you transfer to it during the transfer period (usually the first 60 days after you get the card). Link:
Pros: You can’t get any cheaper than 0% interest, so this is an option we recommend exploring if possible. You can use that 21 month grace period to make payments, 100% of which will go toward reducing your balances.
Cons: You’ll need to have solid credit (in the range of 650+) to get approved to make a transfer to a 0% intro APR card. Also, folks are generally approved for sums less than $8,000. Finally, these cards usually charge a 3% balance transfer fee, which is usually worth it, just make sure you read the fine print.
Example: If you have a $5,000 balance at 18%, your monthly interest charges will be $75. Moving that over to a 21 month 0% intro APR card will save the whole $75/month for 21 months – for a cool $1,575 in savings. In this example, expect to pay a $150 fee, for net savings of $1,425.
Conclusion: One strategy we recommend is to get a 0% intro APR transfer card and move whatever balance you can over to it. Then consolidate the rest onto a personal loan. This way you’ll get the benefits of both approaches.
Carrying a large credit card balance can feel like carrying a crushing weight – but there are very real, very practical strategies you can use to get out from under it. Remember – you can use the financial system to your advantage. Savvy people have been doing it forever.