Using credit cards is an excellent way to make a large purchase and pay off the balance over time. They come in handy when you lack cash. Their responsible use is of utmost importance for your finances, especially if you plan to apply for a loan at some point.
But many people misuse their cards, and they find themselves buried in debt. Besides, excessive use of credit cards can have a negative impact on your credit score. If that happens, your chances of qualifying for the best rates and approval for favorable loans will drop dead.
The power of spending money you don’t have can entice you to spend more than you can afford. That will result in a higher utilization rate. Unfortunately, that’s not a favorable factor for your credit score, even though you pay off your balance on time.
More on other things that can ruin your financial standings find out below:
A credit card is a good option when you face unexpected bills. But things like medical costs, job loss, or income drops can sometimes be out of your power, leading you to exceed the limits and not being able to repay debts on time. And when you’re late with payments, they can quickly raise due to interests and penalties.
People with many monthly installments usually have a hard time managing them. And when credit card repaying is among them, things can get pretty messy.
So if you’re struggling with balance bills, you should know there are several ways for debt relief. But not each of them is suitable for your situation, so you must know your financial circumstances before getting into any arrangement.
You can opt for debt consolidation or settlement. Declaring bankruptcy can bring short-term relief from bill collectors. But in the long run, it’s probably the worst thing you can do if you owe for credit cards. It can have a detrimental effect on your credit score, insurance premiums, future employment, etc.
Card debt refinancing is the direction you should think about. It means moving your debt from one card to another. You should go with refinancing if you can get a lower interest rate and merge multiple card debts into one. That will bring ease of payment and debt management.
So you should know your options, evaluate your current financial situation, and find the best method to get rid of debts.
Low-Interest Credit Card
Repaying your cards with another one might seem odd. But this type of unsecured loan (doesn’t require collateral) can get you on the right path. You just have to lurk for credit cards with low (usually promotional ones) or even a zero percent interest rate. That way, you will settle your debts and not pay a lot in interest.
You indeed have nothing to lose with a balance transfer card. But there are some fees you have to pay, which can be quite high. Also, the interest can go up after the promotional period is over. And it can be higher than the current ones on your existing credit cards. Also, you could carry this refinancing method for years if you make minimum payments.
Personal or consolidation loans are a form of unsecured debt. Their interest rates are low and fairly secured. If you opt for a fixed option, you don’t have to worry about unfavorable interest changes at some point. That makes these loans almost risk-free.
You can use a personal loan to consolidate all of your credit card debts. You pay the same installments every month to the lender until you pay the debt off in a set amount of time.
Once you have decided to take out a personal loan, make sure it makes financial sense. You can check with your local community banks and credit unions or use comparison websites to find the best rates. Just keep in mind that these loans are not cheap.
Home Equity Loan
If you have poor credit, you may want to consider a home equity loan. But you need equity on any real estate you own. It’s a difference between what you owe on a home and its market value. So, for example, if you own a vacation or rental property, you can use their equity to refinance your debt.
This option can be cheaper and come with low interest than other refinance methods. Plus, it can help you pay off your debt quicker. But to stay on a safe path, you should never refinance credit card debts with more than 20% of the home equity.
But home equity loan carries a high risk if you fail to meet its terms. For example, if you fail to settle refinansiering av gjeld installments on time, you can lose your home (collateral for this debt). Also, you might have to pay back a fee if you decide to use this refinancing method.
Borrow from Retirement Account
Probably the least desirable loan is the one that borrows from your 401(k) to pay off your outstanding balances. On the bright side, it’s fast and easy to access and won’t affect your credit. Also, you don’t have to deal with creditors. Finally, this loan has favorable interest rates as it uses your retirement fund as collateral.
But that’s also a major drawback of this refinance method. You take from your nest egg to cover current credit card debts and thus reduce your retirement fund.
So it’s like you get back many steps back. Also, you’ll probably have to pay an early withdrawal fee (10% of the amount) if you’re younger than 59 and a half. But you can also recontribute the taken amount anytime.
Being in credit card debt is bad, so you shouldn’t let that happen. Depending on the amount you owe and your current financial standings, you can choose between several refinancing methods to solve this problem before it escalates. The key is to find a loan you can afford and avoid any options that may worsen your financial situation.