How to pay off your credit cards without refinancing your mortgage
According to latest RBA data Australians owe about $28 billion in credit card debt. When it comes to credit card debt, interest rates can be as much as six or seven times higher than interest rates for you mortgage and twice as much as personal loan rates.
With an average balance of about $4,000, many credit card holders make the mistake of paying just the minimum required, which leads to interest on outstanding balance getting added to what they owe, which can turn into a cycle of ever growing credit card balance.
Before you drown in interest, you have many options to pay off credit cards. Here’s 3 options to pay off your credit cards faster:
1. Use the avalanche method to pay off credit cards
2. Use the snowball method to pay off credit cards
3. Use a personal loan to pay off credit cards
The Avalanche Method – Best if you have more than one credit card
The avalanche Method says to pay off credit card debt by starting with the highest interest rate credit card first. Make sure to pay more than the required minimum payments on your other credit cards.
Once you pay off the highest interest credit card, focus on paying off the credit card with the next highest interest rate. Repeat this process until all your credit card debt is paid off.
The Debt Avalanche Method is the best repayment strategy if you want to minimize the most amount of credit card interest.
The Snowball Method – Best if you have more than one credit card and they have small balances
The Debt Snowball Method says to pay off credit card debt by starting with the smallest credit card balance. Make sure to pay the minimum payments on your other credit cards.
Once you pay off the smallest balance credit card, focus on paying off the credit card with the next highest balance. Repeat this process until all your credit card debt is paid off.
The Snowball Method is the repayment strategy if you want to build momentum and confidence by paying off your smallest balance first.
With A Personal Loan – Best if you want to consolidate and close your credit cards
If you want to pay off credit card debt and cut your interest rate to save money, then a personal loan is a smart strategy. You can consolidate your credit card debt with a personal loan, which is also known as a credit card consolidation loan.
With a personal loan, you can consolidate your existing credit card debt into an unsecured personal loan that is typically repayable in 2 to 7 years. Personal loans range from $1,000-$100,000 depending on the lender.
There are several reasons to consolidate credit card debt.
Cut your interest rate
Some credit cards charge interest rates as high as 10-25%. That means you could be paying a higher interest rate than all your other consumer debt combined. In some cases, high interest charges can make it very difficult to pay off credit card debt. In contrast, personal loan rates today start sub 7%.
Predictable monthly payment
Credit card debt has a variable interest rate, which means that the interest rate may change over the course of your credit card debt repayment. In contrast, consolidate using a personal loan with fixed interest rate, means you pay the same, fixed amount each month regardless of changes in interest rates, which is more predictable.
Easy application process
You can apply online for a personal loan, and can start by comparing lenders and interest rates using a comparison tool found here. Lenders will evaluate your financial and credit profile, including your credit score and income, to determine your interest rate.
If you receive an interest lower than the interest rate on your credit card debt, it may be financially advantageous for you to consolidate your credit card debt. Also, your personal loan can be funded within days, so the process is relatively quick.
How much money can I save with credit card debt consolidation?
Here's how to think about how much you can save with credit card debt consolidation.
Let's assume that you have $16,000 of credit card debt at a 19% interest rate and make a $350 monthly payment. Let's assume you can consolidate your credit card debt with a personal loan at a 6% interest rate and five-year repayment term. You would save $41 per month and $9,791 in total.
You can use this payoff credit card calculator to calculate how much you can save when you pay off credit card debt with a personal loan.
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This article via Business Insider does not constitute advice; readers should seek independent and personalised counsel from a trusted adviser that specialises in property, a tax accountant and property design specialist.