By: Mrs LLC
If you’re an adult living out in the real world, then there is a more than likely chance that you have credit card debt. Expenses always keep coming, and sometimes, your income can’t keep pace. So, you turn to the credit card to keep the wheels rolling.
Some people have to do this more often than others. Of course, these people may find themselves in a bit of predicament after a little while. Excessive credit card debt shouldn’t be taken lightly, and if you aren’t careful enough, you’ll find that you’re stuck making minimum payments each month.
I can attest to that!
There was a time in my life when I found myself getting stuck with credit card debt. Back when I was out of college, I was renting my own apartment with an old college roommate. At that stage, I wasn’t making as much money as I was today, and I may not have juggled groceries, the cost of gas, a social life, and rent as well as I should have. I guess I hadn’t quite learned my money lessons yet.
This formula led to my first experience with a credit card trap.
During my first struggle, I learned about a couple of ways to help myself. When it comes to credit card debt, there are a couple of methods used to set yourself on the path to being debt free. Interestingly, it requires you to take on a new form of debt. It sounded a little scary to me at first, but I banked on one of these to get me out of the pit.
I’ll spoil it right now and tell you I picked the first one mentioned in this article (I wasn’t patient enough for the second). I learned plenty about both of these along the way, so I’d like to talk about them in detail. If you’re in a similar situation as I was, maybe this can help you out!
Balance Transfer Card
So if you’re making payments on your credit card balance at a high interest rate, there is a way to potentially reduce that rate and set yourself up for an easier path forward to being debt-free. To put it bluntly, you open up another credit card! This might not make any sense, but let’s find out why it does.
A balance transfer credit card usually comes with a 0% introductory interest rate offer. This means that for a certain period of time, any balance that you have on the card does not accrue interest. Typically, these introductory periods can last either six, nine, twelve, or occasionally eighteen months.
Here’s how it works:
You open up one of these cards (assuming that you have the credit get one) and simply pay off the entire balance of your old credit card with the balance transfer card. Now you’ve got a zero balance on the high interest card and a big balance on the low interest card, which means you’re ready to make payments on the principal balance without having to worry about interest!
There are a few caveats to this. For starters, you’ll have to pay a balance transfer fee which will either be a flat fee or a percentage of your balance (they choose whichever rate is larger at the time). Secondly, if you can’t pay your balance off before the intro period ends, then you’ll be stuck with interest capitalization again. Finally, if you spend like a maniac after transferring, then you might just find yourself in a worse position by the end of the intro period!
Debt Consolidation Using a Personal Loan
Now we’re on to our next method of eliminating credit card debt: the personal loan.
The incentive is similar to a balance transfer card, but the method is a little different. Instead of paying off rollover credit debt, you’re paying back an installment loan over a structured repayment schedule.
So, here’s how it works. You try to apply for a personal loan from a reputable lender, and if you have a decent credit history and income, then you can potentially qualify for a loan at a lower interest rate compared to your credit card’s rate. If you can get a lower interest rate, then there’s a good chance you’ll have paid less in interest by the time you’re finished repayment.
After getting the loan, you’ll have to start paying down this installment debt like normal. You need to pay back a certain amount each month for a set period, usually anywhere from two, three, five, or even seven years. These options are getting more popular, especially since some credit cards have absurd interest rates.
There are some other benefits to this that a balance transfer card might not be able to match. You can apply for much larger loan amounts with a personal loan, so you can cover large swaths of debt. A balance transfer card could be limited by your credit line, so if you have $10k in debt, a personal loan might be the way to go.
With that being said, a personal loan can be used to consolidate multiple credit cards which a balance transfer may not be able to do. Furthermore, if you don’t have the funds to blast away your credit card debt in six to eighteen months, then a personal loan can be a longer term option that you can handle.
As always, there are a couple of things to consider. If you get a personal loan and still spend like crazy, then you’ll be stuck with even more debt than you can handle at multiple interest rates. If you miss payments on your personal loan, then you risk entering default and massacring your credit. Furthermore, if you don’t have the right credit history, then you could be stuck with debt at a higher interest rate even than your card (personal loans occasionally come at pretty high rates).
Well, there you have it – two ways to get out of credit card debt!
They both have their merits and their drawbacks. A personal loan could be great if you want to pay down your debt over a few years or consolidate your debt; however, you also run the risk of defaulting on an installment loan or getting an even higher interest rate. A balance transfer card could help you pay your debt without any additional interest in a short period of time, but after a few months, you could end up in the same position as before.
I took advantage of a balance transfer credit card because it seemed the most doable to me. I stopped ordering pizza and skipped the bar, which left me with some extra money for a larger credit card payment (without any worry for interest). Also, I understood how credit cards worked, so I was more comfortable taking that avenue.
If you have or had credit card debt, which would you pick?
Mrs. LLC from Lovely Life Cents is a new personal finance blogger that’s still looking for her voice. Check out her blog if you want a fresh take on personal finance!