The average American household has $15,000 in credit card debt alone. Credit card debt has much higher interest rates than mortgages or student loans. Additionally, mortgages and student loans can be considered investments that will secure future earnings and returns, while credit card debt acts as a burden that weighs down your bank account and credit score.
Fortunately, there are two major weapons to attack your credit card debt and repair your financial standing.
#1 Balance Transfers
Generally, promotional interest rates last only a year, after which you’ll probably return to paying a similarly high-rate as you did before the balance transfer. Some people think they can get around this by continuously doing new and multiple balance transfers. Unfortunately, multiple balance transfers are a huge red flag to the credit bureaus and to lenders. This not only can be time-consuming to keep track of when promotional periods end, but also difficult to continuously find new lenders to transfer your balance. Your credit score will definitely be impacted, and you’ll encounter higher rates on any other loans you need to take out, such as a mortgage. The savings from transferring $15,000 of credit card debt could be marginal when compared with a lower rate on a $700,000 mortgage.
In addition, if you plan on continuously transferring your balance, you run the risk of not finding a new lender at the end of the promotional period. This means getting stuck with paying the high credit card interest rate after the promotional period is over.
One thing to be mindful of is the fine print on balance transfers. Usually, any new charges you make on the card will not be eligible for the introductory offer – in other words, if you transfer your balance to a new card, and then use that card to make other purchases, you will be paying a high APR on that new purchase from the day you made it. That means you need to be extra diligent about always paying the balance on the new card. If you don’t, you could find yourself paying a higher rate than the old credit card that you were originally trying to get out of. Sometimes there are transfer fees as high as 3%! Assuming you’re transferring $15,000 of debt, that’s $450 alone on the cost of the transfer. As with all credit cards, keep an eye out for annual membership fees.
The Bottom Line: Under the right circumstances, balance transfers can be a good option. If you are certain that you can pay off your balance within the promotional period and don’t intend to make any major purchases on the new card, a 0% balance transfer could save you a lot of money. You can pay off your debt quickly, not accrue interest, and your credit score will have time to recover before your next major expense, so use it strategically as part of a thoughtful financial plan.
#2 Personal Loans
Another option to reduce your credit card debt is to take out a personal loan. A personal loan is a lot like any other bank loan. You apply for a certain amount, select a term length (how long you want to take to pay the loan off), an interest rate is calculated, and you make monthly payments for the duration of the loan. Typical installment loans are more straightforward than balance transfers. They have a set payment schedule and end date, you cannot redraw against them the way you can with a credit card, and you are not making purchases that can be charged at different interest rates. Like a balance transfer, a personal loan also involves a hard credit pull before the loan is approved.
One benefit of an installment loan is that it offers the opportunity to pay back debt over a longer period of time. Terms usually start around 3 years and can go up to 7 years. If you have a large sum of debt or intend to pay it off over the course of a couple of years, a personal loan is a good choice.
Personal loans generally have more attractive rates than credit card companies, but a higher rate than balance transfer promotional rates. At DRB, we offer personal loans with rates as low as 5.25%. Institutions have rates below 10%. Since credit cards charge rates of 16% to 25%, the savings potential is huge.