Revolving balances rose 11.4% in May, the Fed finds: Here’s how to pay off your credit cards
The coronavirus pandemic kept many Americans in quarantine at home throughout 2020, sheltered from costly activities such as eating and traveling. In addition to spending less, some consumers were able to pocket the extra money from government economic controls, loan deferrals, and expanded unemployment benefits. As a result, they paid off billions in loan debts last year.
But it looks like that trend could be reversed now that the economy is returning to its pre-pandemic state. Consumer credit increased 10% between April and May 2021, with revolving balances increasing 11.4%, according to the Federal Reserve. This suggests that when Americans return to restaurants, airports, and hotels, they write these voluntary expenses on their credit cards.
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Revolving credit card debt is typically interest-bearing, which is bad news for consumers making the minimum payment, as credit card rates are rising too. Between Q1 and Q2 2021, the average credit card rate on interest-bearing accounts rose from 15.91% to 16.3%, according to the Fed.
It may be tempting to resume spending habits before the pandemic, but regulating your spending is important so you aren’t left with high-interest credit card debt. And if you’ve amassed credit card balances like many other Americans in the past few months, now is the time to pay off debts before they get 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 wide variety of financial products on Credible to ensure you are saving as much money as possible while paying off debts.
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3 Ways To Consolidate Credit Card Debt
Credit card consolidation can help you save money on interest rates and pay off your debt faster. They also simplify the debt settlement process by combining all of your credit card balances into a single form of finance with a single monthly payment. There are three main methods of doing this:
- Private loan
- Compensation transfer
- Secured Loan
Compare your options in the sections below and when you’re ready to begin consolidating credit card debt, visit Credible.
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1. Personal loan
You can use a personal loan for almost anything from financing home improvement to paying medical bills. However, by far the most common use for a personal loan is to pay off credit card debt. Here are some things you should know about personal loans.
- They are unsecured, which means they don’t need any collateral. Lenders rely on your credit history and debt-to-income ratio to determine eligibility and set your interest rates.
- They are issued as a lump sum, usually directly to your bank account within a few days of approval.
- They are repaid in constant monthly payments over a set period of months or years so you always know how much you owe and how long you have to pay off your debts.
Most importantly, personal loan interest rates are typically lower than credit card interest rates. The average interest rate on a two-year personal loan was 9.58% in May 2021, compared to 16.3% for credit card interest. By getting a lower personal loan interest rate than you are currently paying on your credit card debt, you can save hundreds of dollars in interest and get on your way to debt free.
When choosing a debt consolidation personal loan, it is a good idea to compare interest rates from multiple lenders to ensure you are getting the lowest rate for your financial situation. Visit Credible to see personal loan offers tailored for you without compromising your credit score.
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2. Credit transfer
Another common method of consolidating credit cards is to use a balance transfer. This will transfer your credit card balance to a new credit card with a lower interest rate.
Credit transfers can be particularly beneficial if you can qualify for a credit transfer card with an introductory phase of 0% APR. Some credit card companies offer 0% APR for the first few months after opening an account, usually up to 18 months. This potentially gives you plenty of time to pay off your credit card debt without ever paying interest.
However, this method of debt consolidation is not for everyone. To qualify for the best deals, you need to have good or better creditworthiness – defined as a score of 670 or higher with the FICO model. Also, you may have to pay a transfer fee, which is usually 3-5% of the transfer amount. 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.
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3. Secured Loan
If you have fair or poor credit and cannot qualify for a personal loan or prepaid transfer card, consider using a secured loan to settle your credit card debt instead.
Secured loans require collateral, so the risk to the lender is lower. The main disadvantage, however, is that if you fail to repay the loan, the lender may seize the asset you used as collateral. That being said, there are a few types of secured loans to consider when paying down credit card debt:
- 401 (k) loan: Certain retirement plans allow you to take out a low-interest loan from the money you have in your retirement account. Since you are borrowing from yourself and not from a lender, you don’t have to do a credit check and pay the interest back to yourself. 401 (k) loans are capped at $ 50,000 or half the vested amount in your retirement account, whichever is lower.
- Secured personal loan: Selected lenders offer loans that are secured by the value of your vehicle. These are a good option when you need a personal loan because of bad credit but you don’t want to pay extremely high interest rates, but they can be risky as you will lose access to transportation if you don’t pay back the loan.
- Refinancing Mortgage Loans: With high home equity and low mortgage rates, now is a good time for homeowners to get refinance. If you choose the mortgage refinance with payoff, you will take out a loan that is larger than your current home loan and use the extra cash to pay off credit card balances.
A comparison of interest rates is always crucial when entering into a financial product, especially when it comes to mortgage refinancing. Mortgage rates are historically low, so there has never been a better time to refinance. Check out which plans you qualify for on Credible.
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