Do you currently have credit card debt? Are you trying to pay it down…but it seems like somehow you just keep getting deeper into debt? Throughout our many years in banking, we’ve worked with a lot of clients in the same situation. So today, we’re going to discuss the best options for paying down credit card debt. First, we’ll talk about why a balance transfer is one of the best weapons in a war on debt. Then, we’ll discuss personal loans and how they work. Finally, we’ll wrap up by reviewing a few options that might be helpful to someone who isn’t able to qualify for a balance transfer or a personal loan.
Hello everyone, this is Luis with Herobanker.com and we’re you’re friendly neighborhood bankers. Debt comes in all forms and sizes. Some debt, like a mortgage or a car loan, can be beneficial. But other debt, like credit card debt, can feel like a huge weight on your shoulders. This is especially true if you’re only making minimum payments and the amount that you owe is going up instead of down. So, if you’d like to find out the best options for dealing with credit card debt, let’s get started. Option #1 is a credit card balance transfer. With a balance transfer, you’ll be taking the total amount that you owe…and moving that balance over to another credit card, with a lower interest rate.
The reason why this is beneficial would be best explained with an example: Sally currently has a credit card with ABC Bank. Her balance on that credit card is $10,000 and the interest rate that she’s paying is 20%. This means that every year, Sally will incur about $2,000 in interest charges on that card. Now, this doesn’t necessarily mean that Sally will pay $2,000 in interest charges for the year. Because if Sally is only making the minimum payment every month, then she’s not even paying down what she owes. So, in this case, Sally’s total debt would be going up instead of down. This is a major factor in how many people end up down the rabbit hole of credit card debt. We highly advise against making minimum payments, when possible. Now obliviously, things happen and sometimes the only option is to make the minimum payment. But if this is the case, then we need to understand that paying high interest on a credit card, is probably not the best way to handle our debt in the long term.
So, what do we do? Well, this is where a balance transfer can help. Remember, Sally has a credit card with ABC Bank. She currently owes $10,000 on that card and she’s paying an interest rate of 20%. Thankfully, Sally comes across a Balance Transfer Credit Card from XYZ Bank. XYZ Bank is offering Sally a new credit card. This card comes with an offer of 0% APR for 12 months on balance transfers. So, if Sally accepts this offer, this means that she’s opening a new credit card with XYZ Bank, with a 0% interest rate for 12 months. The $10,000 credit card balance that is currently with ABC Bank can now be transferred to XYZ Bank, at a much lower interest rate. So, instead of paying 20% on her old credit card she now has 12 months of 0% on the new credit card. Remember, Sally would have incurred about $2,000 in interest if she had continued to pay 20% on her prior card. But with this new card she’ll pay 0 dollars in interest for 12 months because for 12 months her APR is 0%. Paying $0 instead of $2,000 over the same amount of time sounds too good to be true, right? And this is why a balance transfer can be a very valuable tool in your financial toolbox.
When used properly a balance transfer can save you hundreds, if not thousands, of dollars…and because you’re not paying interest during the promotional timeframe, this makes it easier to actually pay down your debt. Now, the new credit card will most likely charge what’s called a Balance Transfer Fee. This means that you’ll pay a small fee in order to process the balance transfer. Some of you may be thinking, I knew there was a catch! Well, not really. Because the typical balance transfer fee is only 3-5%. So, let’s do the math on that. Remember, in one year, Sally would have incurred $2,000 in interest on her prior card. But a 3% balance transfer fee on a $10,000 transfer is only $300. So, over a one-year period, Sally would save about $1,700 by doing a balance transfer…and that is the power of a balance transfer.
A balance transfer can also be used to payoff multiple credit cards, not just one. So, if you owe money on three cards, you can do a balance transfer for each card. This will consolidate all three of those cards into one. Most balance transfers will also allow you to transfer other debts, like a personal loan, as well. So, it’s usually not limited to just credit card debt. One final note on balance transfers is that sometimes they can be done on one of your existing credit cards. So, if you have money available on a credit card, then your card provider may reach out to you with a 0% APR Balance Transfer offer.
These are sometimes sent to you via postal mail and e-mail. Before we move on, if you’d like more info about Balance Transfers and interest on credit cards, check out Herobanker.com. We’ve included links to these pages in the video description. Also, if you’re enjoying the content, we would greatly appreciate it if you can hit that subscribe button. That way, we can keep you updated on banking, finance, the economy, and more.
Ok, the second option for dealing with credit card debt is a personal loan. A personal loan allows you to borrow money for a specific purpose, such as debt consolidation. Once the loan is approved and funded, your existing debt will be paid off and consolidated into one new loan. You will then repay that loan with monthly installment payments, until the loan is paid off. The payment on this loan will have a fixed interest rate and a fixed payment amount every month. So, a personal loan might look something like this: George takes out a $10,000 personal loan. The loan has an APR of 15% with a 5-year term. This means that George will make a monthly payment of $238 for the next 5 years. After that, the loan will be paid off.
You can think of a personal loan as similar to an auto loan. But, instead of the money being used to buy a car, you’ll be using the money to consolidate debt. Ok, now let’s discuss some of the pros and cons of a personal loan. One benefit is that with a personal loan you will have one fixed monthly payment. This usually makes it easier to pay off debt. Also, you will probably pay off your debt quicker and pay less interest. Remember, with a credit card, it’s easy to fall down the rabbit hole of only making minimum payments…and doing this does not actually lower the amount that you owe. In fact, this can often cause the amount that you owe to increase. But with a personal loan, the amount that you owe will immediately start to decrease. This brings us to one of the cons of a personal loan. With a personal loan, you might have a higher monthly payment than you’re used to. This is especially true if at the moment, you’re only making minimum payments on your credit card.
For example, let’s say you have three credit cards and the minimum payment on each card is $25 per month. In this case, you’re only making total payments of $75 per month. But if you consolidate that debt into one personal loan, then your monthly payment will probably be higher than $75 per month. This is because the monthly payment on a personal loan is a principal and interest payment. But with a credit card, those $25 minimum payments are mostly going towards the interest owed, and not the principal balance. Again, think about a personal loan like an auto loan. These loans tend to have higher monthly payments than a credit card. Another drawback of personal loans is that the interest rates tend to be on the higher end. Also, some personal loans can charge fees that can get pretty high. The interest rate and the fees will usually vary, depending on your credit and other factors. Someone with good credit, high income, and low debt, will probably be looked at as a more credit-worthy borrower. This usually means a lower interest rate and no fees. However, someone with bad credit, low income, and a lot of debt, will probably be looked at as a less credit-worthy borrower.
This usually means higher interest rates and relatively high fees. So, you might see that ABC Bank offers personal loans with an APR as low as 9.99%. But remember, it’s likely that the only people who will be approved for that low rate, are people with good credit, high income, and low debt. Someone will bad credit, low income, and high debt will probably get a higher interest rate. Every lender is different.
Some lenders cater to borrowers with good credit. While other lenders cater to borrowers with bad credit. Usually if a lender caters to borrowers with good credit, they will not charge a fee. Or, the fee will be small. But if a lender caters to borrowers with bad credit, then those lenders tend to charge fees that can get pretty high. The most common fee is an origination fee, which is a fee for processing the loan. This fee is usually a percentage of the total loan amount. So, let’s say on a $10,000 loan that the origination fee is 5%. This means that the lender will charge you $500 and then give you $9,500…with the $500 deduction being the origination fee. Obviously, this eats into your total amount received, which is not great. But unfortunately, for someone with poor to fair credit, this might be the only option. Before we wrap up personal loans, we’ll say this: personal loans can be tricky. Oftentimes if you really need a personal loan, then it can be tough to qualify for one. This is because if you’re in need of a personal loan, then it’s likely that you’re already in debt…which a lender is going to view as higher risk.
Therefore, this can make it more difficult to qualify. The third option for consolidating debt is probably the best option. But it requires you being a homeowner. This third option is a Home Equity Loan or Line of Credit. This means that you’re taking out a loan against the equity in your home. We won’t get into all the specifics of how this works, because that would require a video of its own. But basically, if you have equity in your home, then you can take out a loan against that equity. The biggest benefit of doing this is that you will probably secure the best interest rate possible for a loan or line of credit.
This interest rate will likely be much lower than the interest rate for a personal loan. This is because banks really like it when you borrow against your home…because people are less likely to default on a loan, when their home is used as collateral. One drawback to a home equity loan is that they often take a longer time to process. Depending on the lender, the process usually takes a few days to a few weeks.
So, if you need the money fast, then this might not be the best option. Another potential drawback is that you’ll be borrowing against your home, which some people might not like. Ok, so those are three of the best ways to to deal with credit card debt. If none of these options work for you, then there are a few other options.
These are not options that we necessarily recommend, for a variety of reasons. But if all other options have been exhausted, then these may be worth taking a look at. So, we’ll just list these options quickly. But before we list them, we also suggest making sure that you’ve come up with a debt management plan first. This should involve lowering your expenses, if possible, and also having a long-term plan for how to handle your debt. Ok, so these other options include: Number One: Debt settlement programs - These are somewhat similar to debt consolidation loans, but they also have differences. Some non-profit companies will offer debt consolidation loans with certain limitations or contingencies. Other companies will offer debt settlement programs.
They may work with your creditors to lower the amount that you owe. However, this option can be costly, messy, and time-consuming. Also, this option is almost certain to negatively impact your credit. Number Two: 401k or Pension - If you have a 401k, then you may be able to withdraw money or take out a loan out against it. This often comes with penalties and tax implications. So usually, this is not something we advise doing for debt consolidation, unless other options have already been exhausted. Also, if you’ve recently left a job, then you may be able to withdraw from a pension. However, not all companies offer a pension, and this can also come with penalties and tax implications. Number Three: Auto Equity Loan - If you have equity in your vehicle, you may be able to get a loan against the equity. This is similar to a home equity loan.
However, keep in mind that you’re using your vehicle as collateral. So, if you can’t make the loan payments, then it’s possible that your car can be taken away. Once again, these are all options that we wouldn’t usually recommend, unless other options have first been exhausted. Ok, so that’s our conversation about some of the best ways to deal with credit card debt. We hope the information was helpful and easy to understand. We’d love to hear any questions or comments that you might have. Have you recently consolidated your debt? If so, what method did you use and how’s it working out? Or, would you like us to drill down further on anything that we discussed today? Thank you again for taking time out of your day so that we can help you become your own financial hero! We hope to see you again soon.
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