Easy access to credit options have made spending easier among modern Canadians – however, they’ve also made people more ready to spend than ever before. If you do not manage your spending habits, you may quickly land into credit card debt, and these obligations come with exorbitant interest rates which can lead you to a financial rut.
If you are looking for a trusted financial partner, head on to Alpine Credits for some of the best options for debt consolidation. Their experienced professionals will help you manage your debt better. This article will go over five different ways in which you can use debt consolidation to tackle credit card debts and bring them under control again.
How to get out of credit card debt?
As a general rule of thumb, you shouldn’t spend more than 30% of your credit card limit. This ensures that you have a sound credit score and do not fall into the spending trap. However, sometimes situations warrant a higher spending ratio, which can lead to debts. If you find yourself trapped amidst a mounting credit card debt, here are a few options you can resort to.
Credit card balance transfer
As the name suggests, you can transfer your existing credit card debts to a new credit card. Many credit card providers offer a no-interest period (which can range from 12 to 18 months) on a balance transfer to entice customers. Moreover, some companies also offer a waiver on the transfer fee (which is usually 3-5% of the transferred amount).
You can look to tap into this opportunity to move towards a sound financial position. However, make sure that you do not miss out on any payments on the new credit card, whether it pertains to the new or old balance.
In fact, you must make an effort to pay increased amounts during the interest-free period. This is because all the payments you make will go towards reducing your principal amount. The higher principal you repay during the interest-free period, the lower your interest will be when the period ends.
If you do not find any credit card balance transfer offers, you can get a personal loan to pay off your mounting credit card debt. These loans are generally available at a lower rate than your credit card. Thus, you’ll be able to save a lot on interest costs. However, your credit score will play an important role in this loan and its viability.
It’s likely that if you have a significant credit card debt to pay and have missed a few payments here and there, you might not have a very healthy credit score. In this case, the interest rate would be a few basis points higher than the average market rate on personal loans. However, even after an increased rate, it might still be low when compared to your credit card debt and the high rates that come with it.
In the end, you have to compare the costs of both alternatives. If you are able to strike a good deal with your lender on a personal loan, you can save considerably on the interest front.
Tap into your home equity
If you own a home, a home equity loan must be your first choice for paying off your credit card debt. Your existing home equity can be arrived at by deducting any pre-existing mortgages from the market value of your property. For example: if the value of your home is $1,80,000 and you have taken a mortgage of $ 1,00,000. In this case, the remaining $80,000 is your available home equity.
However, this doesn’t mean that the entire available home equity would be offered as a loan. Lenders preferably maintain an LTV of 70-80%. This indicates that you can borrow a total of 70-80% of your home’s market value. Thus, in this case, you can make a maximum borrowing of $ 1,26,000 (70% of $1,80,000). Out of this, you have already borrowed $1,00,000. Thus, you can now borrow the balance of $26,000 to pay off your credit card debt.
The interest rates on these loans are considerably lower than personal loans since the facility is secured by your home. Moreover, depending on your lender and their criteria, your credit score plays little to no role in home equity loans. Thus, even if you have a poor credit score, you would not have to pay a higher interest rate.
Go for debt management
If none of the above methods work out, you may consider opting for debt management services. In this case, a professional debt management expert would reach out to your lenders to negotiate and restructure the terms of repayment.
After this, you’ll have to make a fixed monthly payment to your debt management company, which in turn will make payments to your lenders. Although you will be charged a fee, your overall debt burden will reduce and debt management will become easy.
Consider debt avalanche
If you are bothered by high-interest rates and do not want to resort to any of the methods mentioned above, you can still manage your debt better with sound financial planning. One such tool is debt avalanche. This is how it works:
- List out all your credit card debts along with the interest rates.
- Make the minimum payment due on each credit card.
- Use your surplus sum to pay off the credit card debt with the highest interest rate.
Thus, a debt avalanche essentially involves paying off the debt with the highest interest rate first while ensuring that you do not make defaults on other credit cards. Moreover, this is a method you can use to repay any sort of debt.
You now have a fair idea of managing your credit card debt. Remember that if you do not change your financial habits, you may soon find yourself in credit card debt again. Hence, you must work on the root cause of your debt problem. This entails better financial decisions and avoiding spending on unnecessary wants.
So not shy away from seeking help if needed. A professional can help you understand the loopholes in your personal finance structure and mitigate the pain points.