Debt Payoff Options – What’s the Best Route?

Debt Payoff Options are an important topic as the pandemic continues on with many people experiencing decreased income. Some have relied upon credit cards to help pick up the slack in their monthly budgets.

As people are getting back to work, it’s only natural that they want to eliminate and/or reduce debt before the accumulated interest takes its unforgiving toll.

In this article, we’ll explore a couple of debt payoff options that can be utilized for debt reduction or debt elimination.

Credit Card Interest, Balance Transfers & Monthly Budgets

One method of debt reduction or elimination is to get a balance transfer credit card. Due diligence is important as there are plenty of options to get ahead of the game but if one is not thorough in their research, they could find they’re in a worse situation.

Credit cards come in a variety of “make & models” which has the upside of “there’s a card for almost anyone.” The downside is “your history will be used against you.” A knowledgeable financial planner should be consulted to ensure the cards chosen are in the best interest of the individual, not the card issuer.

Although a person may have great credit, overuse of credit cards, too high of balances, only making the minimum payment, or a missed or late payment will greatly affect the type of card a person can qualify for. This information also dictates the Annual Percentage Rate (APR) you’ll be able to get.

If the interest rates are not favorable, transferring balances to one card to get one “lower monthly payment” may not help to pay off the debt sooner or faster.

It’s important to keep an eye on the goal: Are you trying to retire credit card debt rapidly or trying to get more available cash in the monthly budget?

If you want to pay off debt faster with a balance transfer credit card, it is possible to do so. It’s a matter of finding the right credit card. However, if not careful, a new card might only retire the debt one or two months sooner, and that’s assuming that the individual pays the same monthly payment on the balance transfer card as he or she paid on the original card.

Here’s an example: A credit card with a current balance owed of $1,216.00, the APR is 22.78% and a monthly payment of $100.00, which is above the minimum payment. If that card were just paid off, with no further use, it would take 14 months with $179.29 total paid in interest.

If, however, that balance was transferred to a new “balance transfer” card, with an APR of 14.74% and the same $100.00 monthly payment, then it would be paid off in 13 months with only $36.48 paid in interest. That reflects a savings of about $142.00.

There’s another catch however: Can the individual get that APR of 14.74%? The balance transfer card APR ranges can go as high 24%. Again, due diligence is required. As well, one should look for any balance transfer cards that have an introductory 0% APR.

It’s worth mentioning that if a 0% APR balance transfer card can be obtained, then it would be an excellent strategy to make as high of payments as possible during this introductory period. The savings in interest would be exponentially higher.

Loan vs. High Interest Debt

You may also consider using a personal loan as a solution to retire debt. There are pros and cons to this approach as well. In most cases a personal loan doesn’t require collateral, which means if the credit score rating isn’t in the “good to excellent” range, it may not be an option.

A personal loan can have a 3% to 35% APR range, which is quite broad. Most financial experts agree that a good interest rate for a personal loan should be below the national average, which Experian reported at 9.41%, in Q2 of 2019, and the Federal Reserve recorded at 9.34% in August of 2020.

To get a lower rate a few qualifiers are needed:

• Very good credit ratings
• A decent debt to income ratio
• Steady, verifiable employment

The average interest rate in August of 2020 for a personal loan was 11.88%.

One key benefit of a personal loan to pay off debt is that it is structured to have a certain number of payments at a known amount, which will come to an end on a finite date. Typically, a personal loan will have a one- to five-year life.

Look at a $10,000 loan at 11.42% APR. With a 5-year loan, the monthly payment would be less than $300.00, but more interest would be paid out– over $2,500 in fact.

A shorter loan, perhaps two years, would give a greater monthly payment, but there would be much less interest paid over the life of the loan.

Ultimately, the goal is to retire high interest debt using the vehicle that works best for each person’s individual financial life.

Because there are so many options for credit cards, personal loans, debt retirement/reduction, it is advisable to speak with a financial planner before making any decisions.

Financial planners are well versed in many of the “options” that are available, which often can sound great but have “fine print” that works against the individual.

The bottom line? Smart debt reduction/elimination strategies can save thousands in interest, and put more cash flow in the monthly budget.