If your ability to manage all your various credit obligations is out of control, you’re far from alone.
Not only are many Americans still struggling to recover from the recession, but many are still coming to terms with their inability to pay off their credit card debt. A survey updated in March found 38 percent of all U.S. households carry such debt, which totals $762 billion at the national level. The average balance among consumers who don’t pay off their cards each month is $16,048.
Many Americans wait until they’re facing bankruptcy to address such problems. Others aren’t necessarily dealing with problematic credit, but simply seek better financial terms as they pay it off.
Consider the following tips for addressing your credit balance while maintaining a favorable credit rating.
How to Tell if Your Credit Issues Are Out of Control
Many are so accustomed to relying on credit cards — and so immune to negative feedback from creditors — they simply don’t take their credit problems seriously. But if you’re experiencing any or all of the following, you may need to take action:
- Your combined credit card balances exceed 30 percent of their combined available limits.
- Your credit rating has been downgraded. Depending on who you ask, a score of 640 or less may be problematic.
- Because you’re living beyond your means, you’re using your credit card for basic needs like food, clothing and gas.
- Instead of paying down your balance, you’re frequently switching it to other credit cards.
- You’re having to decide which credit bills to pay each month, skipping payments on some.
- You’re avoiding your credit card statements because they’re too overwhelming.
- You continue to charge more than you’re paying each month.
- Your credit card functions as your only emergency fund.
- Some of your accounts are past due, incurring even more interest.
- Some of your cards are completely maxed out.
How to Consolidate Your Debt
One way to make your debt seem less overwhelming is to consolidate it via a personal, home equity or clear title auto loan offering a fixed interest rate.
First you must understand the difference between secured and unsecured loans. Secured types such as home equity loans or clear title auto loans are easier to obtain because they use something valuable you own (i.e. your house or vehicle) as collateral. They typically offer lower interest rates, higher balances and longer repayment times, along with tax-deductible interest, with the caveat that you could lose your asset if you default. Unsecured loans require no collateral but typically offer higher interest rates, lower balances and shorter repayment intervals; if your credit score is low, they may be harder to obtain.
Of course, getting a loan to consolidate debt only makes sense if the new loan offers a better interest rate than you’re already paying. And be aware it will only help solve your credit problems if you make the lifestyle changes necessary to keep you from accruing additional debt. Compare lenders’ rates, fees and loan intervals before making a decision, and be realistic about the payment you can make each month over the life of the loan.
Such a switch could improve your credit rating, since your score is partly based on the percentage of total credit capacity you’re using. It may also shield you from exorbitant interest rates, reduce or eliminate pressure from creditors and discipline you to save funds for that one monthly payment. You can also incorporate other debt into your loan, including utility and/or medical bills.
Your ease in securing such loans, and the terms involved, will depend on your credit history, whether you’ve made regular payments on your credit cards and whether you have a co-signer. Note that Amplify is not among lenders that charge an “origination fee” of 1 to 6 percent in addition to interest.
Other Ways to Address Debt
A loan is not your only option in addressing problematic credit. Here are a few other solutions:
- Contact creditors to see if you can negotiate better interest rates and/or terms, a task made easier if your payment history and/or credit rating are strong.
- If your credit history is good, you may find a zero-percent interest credit card on which to transfer your balance.
- Many nonprofits offer debt management plans (DMPs), counseling and will negotiate with creditors to help you secure lower interest rates, lower or no late fees and/or more affordable monthly payments. Consider and screen agencies listed through the National Foundation for Credit Counseling or Financial Counseling Association of America. With a DMP, you send one payment to the agency and it splits it among your creditors, usually under a 3 to 5-year plan. Establishing a DMP may hurt your credit rating, though paying off your debt helps rebuild it.
- In general, you should avoid taking out a payday loan as a form of temporary relief because they can so easily compound debt. More info is here.
- In general, debt settlement or bankruptcy should be last resorts since they downgrade your credit rating for at least seven years. Educate yourself on their legal restrictions and consequences.