Consolidating high-rate credit card debt
Average credit card rates are currently at some of the highest percentages on record. According to Bankrate.com, the average variable rate as of 12/21/22 was 19.55% APR thanks to benchmark hikes from the Federal Reserve. Credit card issuers are usually not required to inform customers when APRs are raised on existing accounts, so you may be paying more than you were without even knowing it.
Data accrued by the Federal Reserve suggests that half of all credit card holders carry a balance, which means they are paying high rates on debt they cannot immediately pay off. According to Experian, Americans carry four credit cards on average, which can make managing outstanding balances even harder. If you are struggling with credit card debt, consolidation may make sense for your financial health and goals.
Credit card debt consolidation is a way to pay off your existing balances with another credit product that has more favorable terms — often a personal loan. If you’re making minimum payments on credit cards with high outstanding balances, it can take years to pay them off and cost thousands of dollars in interest charges. Because variable rates can also increase without warning, you may find yourself further in debt for a longer duration.
A fixed-rate personal loan has a set monthly payment and repayment term. Often, the interest rate is lower than credit card rates, and there’s no prepayment fee if you can pay the loan off early. This means you can save over the life of the loan, pay off the debt sooner, and better manage your monthly finances. If you choose this option, it’s important to take these essential steps to ensure a positive outcome:
1) Shop around — Make sure you’re getting the best rate available to you. Check your credit score ahead of time to know what FICO category you fall into.
2) Calculate your payments — Sit down with your credit card bills and add up those monthly payments. Be sure to compare that total amount to what a personal loan payment will be.
3) Understand the terms — You may pay more each month on a three-year loan but save in interest charges compared to having a lower monthly payment with a five-year loan term. Find the right balance for your situation. Also, be sure any loan fees are explained to you upfront.
4) Only accept a loan for the amount you owe — The goal is to pay off your current outstanding balances and not have extra debt. Don’t be tempted to take out more if you’re approved for a higher loan.
5) Limit credit card use or only use them for emergencies — You do not have to close your credit card accounts once they are paid off. However, it is important that you don’t continue to make purchases that you cannot pay off before the next billing cycle, which could lead back to unmanageable debt.
If you are interested in a Debt Consolidation Loan, turn to the experts at Lendmark Financial. Our team can walk you through your options and answer any questions.