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Dear Credible Money Coach,
I’m married and my credit card debt is around $25,000. Naturally, they all have high interest and paying the minimum takes forever. These cards are in my name, not my husband. I probably wouldn’t apply for a consolidation loan since I’m retired and only have social security as an income. Of course, I’m taking money from our joint account, but it’s killing us. We have been eliminating them for years. What is your suggestion?
Thank you – Beth
Hello Beth. I am truly sorry that you have to deal with this financial burden. You are not alone in this struggle. At the end of 2020, Americans had about $825 billion in credit card debt, according to the Consumer Financial Protection Bureau.
And you’re right that making only the required minimum payment each month means it will take a long, long time to pay off your credit card debt. Credit card issuers are required by law to include a disclaimer on your monthly statement explaining how long it will take to pay off your balance if you only pay the minimum. The statement should also tell you how much you will need to pay each month to completely pay off the debt in just three years.
This information can be a good starting point for formulating a plan for pay off your credit card debt. Your plan may include several tactics, such as following the debt avalanche method, taking out a personal loan to consolidate your credit card debt, and rebudgeting to give you more money to spend on your credit card payments.
Let’s look at some strategies that might be helpful.
before you do anything else
Gather all your credit card statements and call each card issuer. Let them know you’re having trouble and look for other ways to pay off your balances sooner. Ask for an interest rate cut or a temporary reduction in payments (although the latter is a kick in the box).
Although the law does not require a credit card issuer to make concessions, it is always worth asking if the card company can help in any way. At the very least, they can suggest other options they can offer. And at best, you might be able to lower your interest rate if there’s a promotion you qualify for.
Consider a debt avalanche or snowball repayment plan
Beth, you didn’t say what other types of debt you might have, but with $25,000 in credit card debt and fixed income, any other type of debt seems equally burdensome. You might consider employing a comprehensive strategy to pay off all your debts, including credit cards.
Two options are the debt avalanche and debt snowball methods.
With the the debt avalanche method, you prioritize paying off the debt with the highest interest rate. Continue to make minimum payments on all other debt and invest as much as possible in the most expensive debt. This will help you pay off that debt faster. Once it’s fully paid off, focus on the card with the next highest interest rate, and so on.
the debt snowball method focuses on paying off the debt with the smallest balance first, regardless of the interest rate. Pay the minimum on all your other debts and put an extra to pay off this card. It may be faster and easier to pay off that smaller balance first, and once that debt is exhausted, you can allocate the amount you were paying to the next largest debt, and so on.
In addition to helping you repay your debts more quickly, these two methods can give you a psychological boost since you will have the satisfaction of seeing your debts decrease.
Replace high-cost credit cards with lower-cost debt
The challenge with the debt avalanche and snowball methods is that they rely on you having extra money to spend on your credit card debt. This can be difficult if your budget is already tight.
Turning high-cost credit card debt into low-interest debt can be one way to give yourself breathing room to move faster toward paying off your total debt.
Here are two possible ways to do it:
Apply for a 0% APR credit card and transfer your balance
Some credit card issuers offer cards that come with 0% APR for a limited time when you open the card and transfer a balance from another credit card. At the end of the promotional period, a regular interest rate will be applied to any remaining balance. If you can repay the entire amount transferred before the end of the promotional period, it can be a good way to avoid paying interest charges for those months and pay off the debt faster.
A few caveats to consider, however:
- The 0% APR is for a limited time, often around 18 months.
- The promotional rate generally only applies to the amount transferred, not to any new purchases you may make with the card.
- You will generally need good to excellent credit to qualify for a balance transfer card.
- Credit card issuers usually charge a fee to transfer your balance.
- You may not qualify for a large enough balance to transfer all of your debt.
Apply for a low rate personal loan
Credit cards are among the most expensive types of consumer credit. I say “general public” because some types of bad loans, like payday loans, can have fees equivalent to three-digit APRs. Since you said your credit card interest rates are high, you might be able to get a lower interest rate with a personal loan.
A personal loan can have several advantages over continuing to pay the minimum on your credit cards, including:
- Potentially lower interest rate — In August 2021, the average credit card interest rate was 17.13%, while the average 24-month personal loan rate was 9.39%, according to Federal Reserve data.
- Final payment date — It can be difficult to know when you’ll be able to finish paying off your credit cards, especially when you’re only paying the minimum amount. Personal loans come with final loan terms, so you’ll know exactly when you’re done paying off the debt.
Although your credit card debt is in your name, there is no rule that you alone should be responsible for any personal loan used to pay off that debt. Combining your Social Security income with that of your husband can help you meet the income requirements of a personal lender.
However, as with any type of credit, personal loans come with possible drawbacks:
- You’ll generally need good to excellent credit to qualify for the best rates, although adding a co-signer with a higher credit score can help.
- Some personal lenders charge origination fees and other fees.
- If you use the personal loan to pay off your credit cards, but keep adding new debt to the cards, you could end up in even more debt.
You can also consider bankruptcy if you find that none of these suggested strategies work for you. But bankruptcy should always be an absolute last resort – its financial and credit effects are significant and long term.
If you decide to transfer your high-interest credit card debt to a low-interest form of debt, it’s essential that you shop around to find the best deal. Rates and terms can vary widely from one credit card company to another, and between personal lenders.
You can use Credible to view prequalified personal loan rates and obtain fee information from Credible’s partners.
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About the Author: Dan Roccato is a clinical professor of finance at the University of San Diego School of Business, personal finance expert Credible Money Coach, published author and entrepreneur. He has held senior positions at Merrill Lynch and Morgan Stanley. He is a recognized expert in personal finance, global securities services and corporate stock options. You can find it on LinkedIn.