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How to Pay Off Credit Card Debt Without Getting Crushed by Rising Interest Rates

Debt Personal Finance Saving
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When most of us open a credit card account, we undoubtedly have every intention of using it responsibly and paying off the balance in full each month to avoid racking up unnecessary interest charges.

But despite our best intentions, it’s not unusual for credit card debt to start piling up. Sometimes we lean a bit too hard on our credit cards during tough times. Or we use them to weather unexpected emergencies or finance big-ticket purchases.

Whatever our reasons, Americans have a knack for accumulating credit card debt. According to the most recent Survey of Consumer Finances by the Federal Reserve, about 44 percent of U.S. families reported carrying a credit card balance in 2016, up from 38 percent in 2013. The average balance reported by families with credit card debt was $5,700.

With interest rates near historic lows for many years following the Great Recession of 2007 through2009, having credit card debt wasn’t necessarily cause for alarm. But now that interest rates are heading back up, many people carrying balances on their credit cards are looking for ways to pay those debts off as quickly and cheaply as possible.

According to reports submitted by lenders to the Federal Reserve, average credit card interest rates have climbed from 12.95 percent in 2013 to 14.89 percent as of August 2017. During the same period, average interest rates on personal loans fell from 10.2 percent to 9.76 percent.

That’s one reason many borrowers are turning to personal loans to pay off credit card debt, in some cases consolidating balances on multiple credit cards. Doing so allows them to save money in two ways — by reducing their interest rates and paying down their loans faster.

Reduce interest rates and accelerate repayment

Making only the minimum monthly payment on your credit card balance can stretch repayment out over many years. If your credit card debt also carries a high-interest rate, your total interest charges can easily exceed the amount you borrowed.

Let’s say your credit card balance is the national average of $5,700, and you are paying 14.9 percent interest on that debt. Most credit card issuers require a minimum payment that’s equal to the amount of interest you owe, plus 1 percent of your balance.

If you only make the minimum payment, you’ll start out paying $128 a month and make payments for 19 years. By the time you’re done, you’ll have paid $6,200 in interest — and that’s on top of the $5,700 you originally borrowed.

If you increased your monthly payment to $197, you’d retire your debt in just three years and pay only $1,400 in interest. That shows the value of accelerating repayment. But what if you could also reduce your interest rate?

If you pay off $5,700 in credit card debt by taking out a three-year personal loan with an interest rate of 9.76 percent, your monthly payment will be $183. Your total interest charges will be about $900.

Three approaches for repaying $5,700 in credit card debt

Interest RateRepayment TermsMonthly PaymentTotal Interest Charges
14.9%19 yearsMinimum ($128 to start)$6,213
14.9%3 years$197$1,403
9.76% 3 years$183$898

In this example, paying off $5,700 in credit card debt with a personal loan saves about $5,300 compared to making the minimum monthly payment. It saves $500 compared to accelerating repayment without an interest rate reduction.

Why consolidate credit card debt with a personal loan

Making a bigger monthly payment helps you pay down principal faster and reduce your interest charges. But it doesn’t reduce your interest rate. And if you’re juggling payments on several credit cards, it can be difficult to keep track of them all.

One commonly employed method of consolidating credit card debt is to transfer balances on high-interest cards to a low-interest card. But keep in mind that low introductory rates on balance transfers may expire before your debt is paid off.

And interest rates on credit cards have been increasing in accordance with benchmarks like the prime rate and the London Interbank Offered Rate (LIBOR).

Consolidating multiple credit card balances by paying them off with a personal loan allows you to lock in a lower, fixed interest rate, accelerate your repayment schedule, and make a single, easy-to-manage monthly payment.

Paying off credit card debt with a personal loan can also improve your credit score. That’s because credit scoring algorithms will often take into account that you’re utilizing less of your available credit card limit. In addition, you’ll establish a history of making payments on an installment loan, which is considered less risky than revolving credit card debt.

If you take out a personal loan as part of a strategy to manage credit card debt, just be careful not to defeat the purpose by running your credit card balances back up to their limits.

Considerations before consolidating

Each lender has its own unique rules to determine if a borrower qualifies for a loan as well as the corresponding rates and terms, so it’s a good idea to check the rates that you qualify for with multiple lenders.

Thanks to integrations with credit bureaus and lenders, the Credible.com marketplace allows you to see the actual rates you’re prequalified for with a range of vetted lenders in about two minutes. The marketplace also protects your credit score, and your personal information isn’t shared unless you choose a specific option.

With upper limits that range from $35,000 to $50,000, the personal loans available from Credible.com’s partner lenders can pay off several big credit card balances. Credible.com’s partner lenders currently offer fixed rates as low as 4.99 percent and loans with repayment terms of two to five years.

Ready to compare personal loan options to consolidate your credit card debt? Visit our partner, Credible, to compare offers from six different personal loan lenders in less than 2 minutes for free and without affecting your credit score.

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