According to USA Today, the typical American grappling with credit card debt holds an average balance of around $6,354. The situation is even more dire in states such as Alaska, New Mexico, and Louisiana, where individuals respectively bear averages of $10,685, $8,323, and $8,110 in credit card debt, based on a study from creditcards.com conducted in 2017.
While this scenario is regrettable, it is not entirely surprising. Many individuals find themselves overly dependent on credit cards during financial hardships, such as job losses or reduced income. The high interest rates exacerbate this issue, with the average credit card APR exceeding 17%. The substantial interest accrued on revolving credit card balances makes it challenging to reduce the principal, frequently trapping consumers in a cycle of debt for years while they accumulate even more financial obligations.
Various methods exist for individuals looking to alleviate their debt, one of which is the option to apply for balance transfer credit cards. These cards typically offer a 0% APR for an introductory period—usually spanning 12 to 21 months. However, users must often pay a balance transfer fee ranging from 3% to 5%, and this introductory rate is temporary.
While some find success in using balance transfer cards to reduce their debt at 0% APR, others merely opt for minimum payments, making little actual progress in paying down their debt. Consequently, when the promotional rates expire, they often find themselves back where they started, burdened with significant debt and high APRs.
A potentially more straightforward route to achieving debt relief involves taking out a personal loan. (Refer to: 5 Instances Where Personal Loans Could Outperform Credit Cards)
How a personal loan can aid in debt reduction
Although the idea of securing a new loan to exit debt may seem counterproductive, there are several advantages to personal loans. Firstly, these loans typically feature low fixed interest rates, with some rates as low as 4.9% APR for individuals with good credit. Secondly, personal loans come with set repayment schedules that clearly indicate when you will be free from debt.
Personal loans offer fixed rates and repayment plans, resulting in consistent monthly payments that remain unchanged. This is a stark contrast to credit cards, where payments fluctuate based on outstanding balances and APR.
By utilizing a personal loan to manage debt, you gain clarity regarding your financial commitment. You’ll know your monthly payment, when your loan will conclude, and your interest rate will remain constant throughout the term. Importantly, a personal loan does not function as a line of credit, eliminating the temptation to accrue additional debt once your existing obligations are settled.
Implementing a Strategy for Success
If your New Year’s resolution is to eliminate debt, securing a personal loan could be the solution you need. However, achieving the best outcome requires a thoughtful approach to repayment.
Evaluate personal loan options
Personal loans are available through major financial institutions like banks and credit unions, as well as numerous online lenders. To maximize your chances of finding the best option, it is wise to compare various offers based on interest rates and fees.
Top-notch personal loans are typically those that do not charge origination fees, application fees, or hidden charges. For a convenient way to explore multiple options simultaneously, consider using LendingTree, which allows you to fill out a single application and receive offers from various lenders at once. (Refer to: 5 Personal Loan Fees You Should Avoid)
Utilize this comparison tool to identify your ideal personal loan by selecting the type, amount, credit rating, and state for tailored options.
Develop a financial plan
After reviewing personal loan offers, you will have a clearer picture of your new monthly commitments. At this stage, it’s essential to devise a detailed budget or spending plan to help you manage your new loan effectively.
Review your bank statements to discern your income versus your expenditures, including the new personal loan, housing costs, and other bills. Look for opportunities to cut back on spending—perhaps by dining out less, temporarily suspending cable services, or instituting a spending freeze. It’s crucial to maintain awareness of what you can realistically afford each month while managing your financial obligations.
Avoid credit card usage
Lastly, it is imperative to refrain from using credit cards. This step is critical and should not be overlooked.
While consolidating credit card debt with a personal loan may resolve some issues, failing to avoid credit card usage can lead to a repeat cycle of debt accumulation. If you start using credit again, you risk building up even more debt that you’ll need to repay.
Your best approach is to securely store your credit cards and rely on cash or debit for purchases. To successfully get out of debt—and stay out—learning to live within your means is essential. Avoiding credit card usage is the key to maintaining a budget that aligns with your financial capabilities.
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