Americans are addicted to debt. The collective household debt in America is above $420 billion. The average credit card debt is almost $7,000.
Add on top of this the fact that credit scores on average are poor (687) – you might think it’s impossible to make wise financial decisions in this country. But that couldn’t further from the truth.
Here’s our advice.
How Do Credit Cards Work?
When someone issues you a credit card, they’re extending you a relative loan. You can use their money to buy stuff up to a certain amount. They give you a month to pay it back, or they charge high interest on your purchases.
Average credit card interest is upwards of 17 to 25 percent. While this sounds like a high interest rate, it is significantly lower than if you are using bad credit loans or other high interest loans.
And depending on how good your credit is, you could have a credit limit as high upwards of $30,000 or more. Lower credit cards will have somewhere around a $2,000-$3,000 limit. That’s the amount of money you can spend with the card.
Credit cards are considered revolving debt. Your credit limit can increase if you spend more and pay off more. You’re showing that you’re responsible with their credit line by spending and paying off the money.
Credit card companies make money not just from interest, but from the fees they exact on businesses allowing the card. They’re not there hoping you default on your credit card. They want to keep spending for a more sustainable income on their end.
How to Use a Credit Card to Get Out of Debt
Some credit cards have an introductory APR of 0 percent for a year or more. This means that if you pay off the card within those 12 or more months, they charge no interest.
If you have debt on another card, find one of these zero interest cards and see if you can transfer your debt over. They might charge a small fee, but it’s worth getting out of debt in the end.
If your credit score has been damaged in the past, you can consider some of these tips to raise your credit score in 30 days. That might help you qualify for a larger credit line or lower interest rate.
How Do Personal Loans Work?
Personal loans aren’t always better. But if you can’t get a zero interest credit card, a personal loan will have a lower interest rate. You’re even better off with one of these loans if you have excellent credit.
Remember, this is a loan. It’s not credit. You get the money upfront for an express purpose.
If you want to get out of debt more quickly, you can use a personal loan with a lower interest rate. You can use a larger personal installment loan to pay off any credit card or payday loans online that you are working to pay off.
You’ll choose a set number of monthly payments and pay off your debt. We recommend you pay it off as fast as you can. You want to get out of debt, not sustain it.
One type of loan you might consider if you have low credit is a home equity loan. With this, you borrow against the equity of your home.
Personal Loan vs Credit Card: It Depends
Your situation and how eager you are to get out of debt are two factors to evaluate when considering a personal loan vs credit card loans. If you have low credit, search for a zero APR credit card. If you need the motivation of a deadline and have higher credit, choose a personal loan. Here are some other articles that might help as you look into both options: