In the most recent edition of their monthly Consumer Credit Report, the Federal Reserve reported that revolving credit, specifically credit card balances, fell for the sixth straight month amid the coronavirus pandemic. The total amount of credit card debt decreased by $9.4 billion in August as compared to July.
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If you want to join the many Americans who have been working hard to manage their debt in this time of financial uncertainty, keep reading. Below are tips for how you can reduce your credit card debt and pay it off quickly.
- Take out a debt consolidation loan
- Open a balance transfer card
- Prioritizing debt
Armed with this knowledge, you should be able to plan how to reach a zero balance on your cards.
Taking out a debt consolidation loan
The first option is to take out a debt consolidation loan. In the world of personal finance, a debt consolidation loan is a personal loan that is used to pay off your credit cards and consolidate your debt into one balance.
Credible makes it easy to find the best personal loan as you can use their online loan marketplace to compare rates and terms from multiple lenders at one time without affecting your credit score.
This method can be useful if you find keeping track of all your monthly payments confusing because it allows you to streamline them all into one single payment. As an added bonus, according to the Federal Reserve, personal loans often come with lower loan rates than credit cards. Their data shows that the average interest rate on a credit card is roughly 14% while the average interest rate on a personal loan is only about 9%.
Since you'll likely be paying less interest each month if you consolidate your debt into this type of loan, you should be able to put more money towards your principal balance and get out of debt sooner.
2. Opening a balance transfer card
Another option is to open a balance transfer credit card. As the name suggests, balance transfer credit cards allow you to transfer all of your existing balances into one place. Additionally, these cards usually offer a welcome bonus of a 0% APR intro period, meaning that you'll be given a set period of time when interest will not accrue on your transferred balance.
Consider using an online marketplace like Credible to compare some top balance transfer cards side-by-side.
It's important to note that the best balance transfer cards are generally only available to those with a good or excellent credit score. In addition, balance transfers almost always come with a balance transfer fee, which is usually a percentage of the total amount being transferred.
Truthfully, you also have to consider how applying for a new card will affect your credit score. On the one hand, every time you apply for a new credit card, another hard inquiry will show up on your credit report, which can lower your score. However, sometimes adding more credit to your financial profile can actually lower your credit utilization ratio and help improve your score.
In the end, the best way to minimize the overall impact on your score is to look over the card details before you apply to ensure that you are a good candidate for the card and to only apply for one card at a time in order to minimize the impact of the credit check.
If you’re not sure where your credit stands, don't worry — you can check your credit score for free. Once you determine your credit score (and if it's a good or excellent credit score), then you should explore your credit card options by visiting Credible to compare.
Finally, if you don't want to try either of those debt consolidation methods, you can pay off debt using a popular prioritization strategy. In this case, you can choose from either the debt avalanche method or the debt snowball method.
- Debt avalanche method: With the debt avalanche method, you focus on paying down your credit card with the highest interest rate first. Here, you’ll pay the minimum payment on all of your other credit cards and then put any excess money you have into paying down the balance on your chosen card. Once that card is paid off in full, you'll work to pay off your card with the next highest interest rate.
- Debt snowball method: With the debt snowball method, you’ll work to pay down your card with the smallest balance first. Again, you’ll make sure to pay the minimum payments on all of your other cards before putting any excess income into your card with the smallest balance. Then, once that card is paid off, you can move to the card with the next smallest balance and so on.
The benefit of the debt avalanche method is simple: if you choose this method, you'll pay less in total interest charges over time. However, the downside is that it can take a while to see progress. If you think you might do better getting instant gratification from a series of small wins, try the debt snowball method instead.
Visiting Credible can help you get a sense of whether debt prioritization is for you or if getting a personal loan might be a better fit.