Credit card debt builds up for many reasons. Sometimes you have unexpected expenses (the car broke down on the way to the dentist) and sometimes your income suddenly drops (the sale commission didn’t come through or extra hours were cut down). No matter what the reason, using credit cards to make ends meet is definitely a short-term solution. You can only draw so much money before your credit limit runs out. The credit cards payments take a bigger bite of your income – not a pleasant ride if taken for too long.
Is a Credit Card Debt Loan Right for Me?
One solution to solve debt problems is to take out a credit card debt loan. In order to utilize this debt relief strategy, answer these questions:
What can I afford?
- Can I pay off my balances without a loan? Can I afford more than minimum payments?
- Do I want higher payments/pay off my debt quicker or have smaller payments and pay off for a longer term?
What security can I offer to help take out a loan?
- Do I have enough equity in my house to do a cash-out refinance, or take a home equity loan?
- Is my credit score good enough to take out a personal loan at a rate much better than my credit cards?
If you cannot afford to make minimum payment, or have bad credit, then your credit card debt loan options will be very limited and very expensive. You should seek other debt relief options, especially a debt settlement program.
If you have good credit and/or equity in your house, then look into a credit card debt loan. Trading credit card debt for a different type of loan can help to solve cash flow problems (lower payment), or even more efficiently pay off your loan (lower term). In any case, make sure that you have a good budget and won’t run up new credit card debt.
Credit Card Debt Loan option #1: Using Home Equity
If you have a good credit score and equity in your house, then consider taking out a cash-out refinance loan or a home equity loan. One disadvantage of using your home as security is that you will be transferring unsecured credit card debt to a secured loan. That means, if you default on the loan, then the lender can pursue collection actions against you personally, as well as foreclose on your home.
In order to get started do the following:
- Calculate your minimum monthly payment for your credit card.
- Calculate your principal and interest payment on your mortgage.
- Check the value of your house.
- Check that your LTV ratio will be below 80%, your DTI about 45%.
Choose either a 30-year plan to keep your payments as low as possible, or a shorter period based on the maximum amount that you can afford. Quicken Loans, for example, offers the Yourgage loan, which allows you to choose the term of the loan most appropriate to your budget. The main advantages of a HELOC or cash-out refinance to pay off credit card debt are:
- Save money: You can lower your payment with a long-term loan at a lower interest rate. You will save money (if you have high interest or high balances on your credit card debt) by taking a HELOC or cash-out refinance. However, if you are planning to sell the house within a few years, then the costs of taking out the loan may wipe out any savings.
- Better Payment schedule: You can lower you payments, due to a lower interest rate and a long term.
Credit Card Debt Loan Option #2: Personal Loan
The best time to take care of Credit Card Debt is before you run up a lot of debt and big bills. Remember, your credit score is affected by the amount of credit you utilized. The higher your credit utilization ratio is, the lower your credit score will be. A lower credit score will significantly reduce your options for finding a HELOC or a Personal loan.
If your credit is good then start looking for a personal unsecured loan with your bank or credit union. Personal loans start about 10.8% and can run very high, to around 28%. The actual rate will depend on your credit score and credit history, as well as other criteria that each lender has. If you are paying off credit card debt with a personal loan, do not trade in high interest rate credit for a high interest rate loan.
Make sure that you avoid payday loans or other bad credit personal loans. They come with very high interest rates and fees, with difficult to meet payment terms. If you do not pay on time, then you will face very aggressive collection agencies.
Credit Card Debt: Getting Off the Ride On Time
Don’t wait to deal with your debt problems. Here are some good tips to deal with credit card debt:
- Create and maintain a budget, put aside a rainy day fund, save for the future, and do not run up credit card debt.
- Avoid limiting your payment to a minimum payment, which stretches out your payoff term.
- Don’t max out your credit cards because this will negatively affect your credit score and ability to find new and cheap loans.
- If you have equity and a good credit score, then shop around for better terms.
- Look into a credit card debt loan to save money and help you get into a better financial position.
Get off the roller coaster before you run up big credit card debt and it is too late to get off. If you do have serious problems, then deal with them by looking into alternative debt relief solutions.