Worried about pandemic credit card debt? Here are 2 ways you can deal with it
Many Americans are struggling to make bill payments in the midst of the pandemic with the average credit card debt for American families sitting at around $6,270, according to data from the U.S. Federal Reserve.
Total U.S. household credit card balances jumped by $12 billion in the fourth quarter of 2020, after decreasing in the two previous quarters. And interest rates for credit cards have increased over the past five years — the average interest rate was 15.91% in February of this year compared to 13.56% in 2016.
If you have a high-interest credit card and find yourself struggling with minimum payments, you may want to consider one of two solutions: Credit card refinancing or credit card consolidation.
Here are the pros and cons of both options to help you choose the best way to deal with your credit card debt.
Credit card refinancing
Is that mountain of credit card debt starting to seem insurmountable? Those missed payments and high interest rates can really stack up — but that’s where balance transfer credit cards come in.
Credit card refinancing is simply moving your balance from one card to another so you can take advantage of lower interest rates.
Ideally the new card would come with a 0% interest rate for a promotional period. Often, these introductory rates last between 12 and 21 months, giving you time to pay down your debt, before switching back to a higher rate.
According to LendingTree, the average APR for balance transfer cards following the introductory period was 18.17% for April 2021.
Just bear in mind that, depending on your credit score or amount of debt, you may not be able to take advantage of the best balance transfer credit cards.
Consolidating credit card debt
If you’re juggling debt on multiple credit cards, you might want to consider a consolidation loan. You can roll several credit card balances into one lower-interest loan, which means you only have to worry about one payment and interest rate instead of coordinating multiple payments every month.
A personal loan is generally paid out in a lump sum from the lender with a fixed rate and term. That means the interest rate won’t change for the duration of the loan, and you will have the same monthly payment until the loan is fully repaid.
You can find the right debt consolidation loan by comparing multiple lenders to find one that suits your needs. The higher your credit score, the greater your chances of getting approved and getting a better rate.
Lenders are less likely to approve unsecured loans if you don’t have a decent credit score. There are options for borrowers with a lower credit score, but they might involve higher interest rates and monthly payments.
Refinancing vs. consolidation
Deciding between these two options depends on your current situation and future goals.
If you’re just looking to lower the interest rate on your credit card, refinancing is likely the best option — even if you don’t qualify for a zero interest introductory period on a balance transfer card, you can still try to switch to a card with a lower APR to save money on interest.
If you’re looking to pay off your credit card debt completely — and can’t imagine doing so during the intro period of a balance transfer credit card — then a debt consolidation loan is probably a better option.
Both options offer the possibility of lower interest. As you weigh your options, don't forget to crunch all of the numbers. Factor in any card fees and make sure the monthly payment is something you can handle for the length of the loan term.
Other ways to boost your budget to help pay debt
Refinance your mortgage: Mortgage rates remain historically low, so refinancing into a lower rate could save homeowners hundreds of dollars a month and thousands over the life of their loan.
Slash your insurance rates: You may be overpaying for your car insurance by more than $1,000 a year. And finding a better offer is as simple as shopping around for the best price. While you’re at it, you also could save hundreds on homeowners insurance by comparing quotes.
Sell your old stuff online: Got any old toys or tech collecting dust in the back of your closet? Clear out the clutter and make some extra cash by selling your old things online for free. You won’t even need to pay for shipping. If you are shopping online and want to save money, you can download a free browser extension that will do the deal hunting for you.
Invest your spare change: Making money in the stock market doesn’t mean you have to spend big. You can use a popular app that lets you invest your spare change to grow a diversified portfolio.
