The coronavirus pandemic kept many Americans in quarantine at home in 2020, sheltered from expensive activities such as dining out and traveling. Some consumers not only spent less, but were able to pocket the extra cash from federal incentive checks, loan forbearance and comprehensive unemployment benefits. As a result, they paid off billions of dollars in credit debt last year.
But it appears that trend is reversing as the economy returns to its pre-pandemic state. Consumer credit increased by 10% between April and May 2021, with revolving balances up 11.4%, according to the Federal Reserve. This suggests that when Americans return to restaurants, airports, and hotels, they put these discretionary spending on their credit cards.
Revolving credit card debt is typically estimated interest, which is bad news for consumers who make the minimum payment as credit card interest is also rising. Between Q1 and Q2 2021, the average credit card interest rate on interest-bearing accounts rose from 15.91% to 16.3%, the Fed said.
It may be tempting to resume pre-pandemic spending, but it’s important to regulate your spending so you’re not left with high interest rates credit card debt. And if you’re like many other Americans who have built up credit card balance over the past few months, now is the time to pay off debt before it gets out of hand.
There are several ways to pay off credit card debt, from personal loans to balance transfers. You can compare interest rates on a variety of financial products on Credible to ensure you save as much money as possible while paying off debt.
3 Ways to Consolidate Credit Card Debt
Credit card consolidation allows you to save interest and pay off your debt faster. You also simplify the debt repayment process by combining all your credit card balances into one form of financing with a single monthly payment. There are three main ways to do this:
- Personal loan
- Transfer balance
- Secured loan
Compare your options in the sections below and head to Credible when you’re ready start consolidating credit card debt.
1. Personal loan
You can use a personal loan for almost everything from financing home improvements to paying off medical bills. But by far the most common use for a personal loan is to pay off credit card debt. Here are a few things you should know about personal loans.
- They are unsecured, meaning they don’t need collateral. Lenders will rely on your credit history and debt-to-income ratio to determine your eligibility and determine your interest rates.
- They are issued in a lump sum, usually directly to your bank account within a few days of approval.
- They are repaid in consistent monthly payments over a period of months or years, so that you always know how much you owe and how long you have until your debt is paid.
The most important is, personal loan rates are usually lower than credit card interest rates. The average rate for a two-year personal loan was 9.58% in May 2021, compared to 16.3% for credit card rated interest. By getting a lower personal loan rate than you currently pay on your credit card debt, you can save hundreds of dollars in interest and be on your way to becoming debt free.
If you decide to use a personal loan for debt consolidation, you should compare the interest rates of multiple lenders to make sure you get the lowest rate for your financial situation. Visit Credible to view tailor-made personal loan offers, all without affecting your credit score.
2. Balance transfer
Another common way to consolidate credit cards is to use a balance transfer. This means transferring your credit card balances to a new credit card with a lower interest rate.
Balance transfers can be particularly beneficial if you qualify for a balance transfer card with a 0% APR introductory period. Some credit card companies offer 0% APR periods for the first few months after opening an account, usually up to 18 months. This can give you enough time to pay off your credit card debt without ever accruing interest.
However, this method of debt consolidation is not for everyone. To qualify for the best offers, you need a good or better credit score — defined as a score of 670 or higher using the FICO model. In addition, you may have to pay a balance transfer fee, which is usually 3-5% of the amount transferred. And be aware of credit card balance transfer limits, as you may have more debt than you can transfer.
Find the right credit card issuer for your needs on Credible.
3. Secured Loan
If you have fair or bad credit and you don’t qualify for a personal loan or balance transfer card, consider paying off your credit card debt with a secured loan.
Secured loans require collateral, so it is less of a risk to the lender. The biggest drawback, however, is that the lender can seize the asset you used as collateral if you don’t repay the loan. That said, there are a few types of secured loans to consider when paying off credit card debt:
- 401(k) loan: Certain pension plans allow you to: borrow a loan at a low interest rate of the money you have invested in your retirement account. Since you are borrowing from yourself and not from a lender, you do not have to undergo a credit check and pay interest back to yourself. 401(k) loans are limited to $50,000 or half the amount accrued in your retirement account, whichever is less.
- Secured personal loan: Select lenders offer loans that are secured by the value of your vehicle. This is a good option if you need a personal loan for bad credit, but you don’t want to pay extremely high interest rates, but they can be risky because you will lose access to transportation if you don’t repay the loan.
- Cash-out mortgage refinancing: With high equity and low mortgage rates, now is a great time for homeowners to refinance. When you choose the payout mortgage refinance option, take out a loan in excess of your current home loan and use the extra money to pay off credit card balances.
It is always critical to compare interest rates when taking out a financial product, and that is especially true when it comes to refinancing mortgages. Mortgage rates are historically low, so there’s never been a better time to refinance. See which rates you qualify for on Credible.
Do you have a financial question, but don’t know who to ask it? Email The Credible Money Expert at: email@example.com and your question can be answered by Credible in our Money Expert column.
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