Your Money Working Harder
The average American with credit card debt carries a balance of approximately $6,354, according to USA Today. In states like Alaska, New Mexico, and Louisiana, the situation is even more dire, with average debts of $10,685, $8,323, and $8,110, respectively, as of 2017.
This scenario is unfortunate but not entirely surprising. Many individuals rely heavily on credit cards during financial hardships, such as job loss or reduced income. The average credit card APR exceeds 17%, making it challenging to chip away at the principal balance. Consequently, many find themselves trapped in a cycle of debt, often accumulating more over time.
To tackle this issue, consumers often turn to balance transfer cards, which offer 0% APR for a limited period—typically between 12 to 21 months. However, these cards usually come with a balance transfer fee of 3% to 5%, and the introductory offer is temporary.
While some successfully use balance transfer cards to reduce their debt, others merely make minimum payments, failing to make significant progress. Once the introductory period ends, they often find themselves back where they started, burdened with high-interest debt.
Fortunately, there is a more reliable method to escape debt: personal loans. (See also: 5 Times Personal Loans May Be Better than Credit Cards)
How a personal loan can help you climb out of debt
Although applying for a loan to eliminate debt may seem counterintuitive, personal loans can be an effective solution. They typically offer low fixed interest rates—sometimes as low as 4.9% APR for those with good credit. Additionally, personal loans come with fixed repayment schedules, providing clarity on when you will be debt-free.
Unlike credit cards, where payments fluctuate based on your balance and APR, personal loans have a consistent monthly payment. This predictability allows you to plan your finances more effectively. With a personal loan, you know exactly what to expect: your monthly payment, the total duration of the loan, and the interest rate throughout the term. Importantly, a personal loan is not a revolving line of credit, meaning you cannot accumulate more debt once you pay off your credit cards. (See also: 10 Things You Need to Know Before Taking Out a Personal Loan)
How to do it the right way
If your goal is to eliminate debt this year, a personal loan could be the solution you need. However, it’s essential to approach repayment strategically.
Compare personal loan offers
Personal loans are available from banks, credit unions, and various online lenders. Start by comparing offers based on interest rates and fees. The best personal loans typically do not have origination fees or hidden charges. For a streamlined comparison, consider using LendingTree, which allows you to fill out a single application and receive multiple offers.
Utilize this handy comparison tool to find the best loan options based on your credit rating and state.
Create a spending plan
Once you have a clear understanding of your new monthly payment, it’s crucial to develop a monthly budget. Review your income and expenses, including your new personal loan, housing costs, and other bills. Identify areas where you can cut back, whether it’s dining out less or temporarily canceling subscriptions. Understanding your spending limits will help you manage your new financial obligations.
Stop using credit cards
Lastly, it’s vital to stop using credit cards. This step is crucial to avoid falling back into debt. If you continue to use credit cards after consolidating your debt with a personal loan, you risk accumulating even more debt.
To maintain financial discipline, consider putting your credit cards away and relying on cash or debit for your purchases. Living within your means is essential for achieving and maintaining a debt-free lifestyle.
