Are you carrying a painfully large balance on your credit card? Are you finding it difficult to make payments every month?
If so, you are certainly not alone.
Data from the Federal Reserve shows that more than 40% of the households in the country have credit card debt. The amount of debt carried by the average household is $9,333.
The problem with credit card debt is that it grows faster than any other kind of debt, thanks to the astronomical interest rates. If you make the mistake of paying only the minimum every month, like many people do, you can get sucked into a long-term debt trap.
Here are some proven and legitimate ways in which you can consolidate your credit card debt and pay it off quickly.
Balance transfer
If the outstanding balance on your credit card has grown too large for you to manage, you can get it transferred to a new card with a lower interest rate. There are several advantages in doing so.
- If you have two or three credit cards, you can transfer the entire balance to a new card and avoid making multiple monthly payments.
- The lower interest rate allows you to save a significant amount of money in the long run.
- Most importantly, balance transfer cards usually have an introductory offer wherein you will not be charged any interest on the outstanding balance.
- The 0% APR period can be anywhere from 12 to 18 months. By paying off the bulk of your outstanding balance during this period, you can save a ton of money.
The downside is that you might have to pay a balance transfer fee, usually a small percentage of your total outstanding balance.
Personal loans
If you are looking to pay off your credit card debt in full, getting a personal loan might be the best option for you.
You can use the proceeds from the loan to pay off your outstanding balance and then repay the loan over a period of time, anywhere from 12 to 60 months.
The rate of interest on a personal loan is typically much lower than what your credit card provider charges you, which allows you to save a lot of money.
It should be noted that in order to qualify for a low-interest personal loan you need to have a good credit score — 700 and above. Also, the monthly payments might be larger than the minimum payments on your credit card, so you need to adjust your monthly budget accordingly.
Cash value insurance
If you have a whole life or universal life insurance policy which has accumulated a significant amount of cash value, you can use it to pay off your credit card debt.
You can make a withdrawal or get a cash value loan from your insurer. The rate of interest on a cash value loan is much lower compared to the rate of interest on a personal loan since you are borrowing against your own money.
It’s necessary to repay the cash value loan in a timely manner. Otherwise, your insurer will deduct the outstanding balance (principal amount, interest payments, and penalties, if any) from your policy’s death benefit.
Home equity loan
If you are a homeowner, you have the option of getting a home equity loan which allows you to borrow against the built-up equity in your home to pay off your credit card debt.
The advantage of a home equity loan is that the rate of interest is much lower compared to a personal loan or a balance transfer credit card.
The downside of getting a home equity loan is that you have to put your house on the line, which can be risky. If you are unable to repay the loan for any reason you could lose your home.
Cash-back auto refinance loan
It is similar to a home equity loan, except the fact that you are borrowing against the built-up equity in your vehicle.
The interest rate on auto refinance loans is generally lower than other types of loans, since your vehicle is used as collateral. The downside, as you can guess, is that you risk losing your vehicle if you are unable to pay back the loan.
Debt management program
If you are overwhelmed with debt and unable to figure out a way out it might be time to seek the help of a debt management company.
They can negotiate with your credit card provider and other lenders on your behalf, reduce the interest rate to the extent possible, and draw up a repayment plan with favorable terms and conditions.
The biggest advantage of a debt management program is that the interest rate is reduced significantly, which allows you to pay off your debts quickly and save a lot of money in the process.
The downside is that your credit card accounts will be closed during the course of the repayment period, effectively denying you any access to credit.
Borrowing money
If you have a family member or a friend who is financially stable and is willing to lend you money, you can use it to pay off the outstanding balance on your credit card.
The advantage of borrowing from a family member or friend is that you do not need any collateral or security. The downside is that it can affect your relationship, especially if there is a delay in repaying the loan.
Retirement account loan
If the aforementioned options are not available to you, you can borrow from your 401(k) account.
You are allowed to borrow up to 50% of the amount in your account or $50,000, whichever is lesser. The interest rate on a 401(k) loan is much lower than a personal loan and it does not have any adverse impact on your credit score.
Borrowing from your retirement account is generally not a prudent idea, however, as it can mess up your retirement planning and you might have to pay significant penalties.
Consider this option only if the other strategies mentioned here do not work for you.
