Getting out of debt may require creative thinking.
It is an era of increasing economic pressure. Americans now have a total of $1 trillion in credit card debt, and delinquency rates are rising. The monthly balance rose to $5,947 in the second quarter, up from $5,270 a year ago, according to a recent TransUnion report.
The average two-year personal loan interest rate of about 11.5% is about half the average annual interest rate of 22% for a credit card with a balance and accruing interest, according to the company. Federal Reserve Statistics Until May. Of course, depending on the financial institution, the personal loan interest rate may be in his mid-twenties or even higher.
All this debt is coming at the wrong time. Pandemic-era savings surpluses are drying up, and federal student loan payments will resume in October. One solution is a personal loan to consolidate your credit card debt. It might be a way to relieve this pressure.
The first and perhaps obvious question: Do you have a good credit score? This is important for anyone who wants to get a loan from banks or fintechs with interest rates lower than credit card rates. It is possible to achieve this even when interest rates are very high.
On average, credit card debt consolidators were able to reduce their balances by nearly half and improve their credit scores by an average of 18 points, according to the company. the study Released last week by TransUnion
TRU
,
One of the three major credit bureaus along with Experian
EXPGF
and Equifax
EFX
.
“Credit card debt consolidation firms experienced an average 57% reduction in credit card balances after consolidation,” the report states. “However, at many credit card debt consolidators, balances returned to near previous levels after 18 months.”
Other research also shows that consolidation pays off.Another study found that credit scores of those using personal loans to pay off card balances rose by 30 points. lending tree The results of the study were also published last week. After 3 months, these scores increased by an average of 22 points.
But it’s not for the faint of heart. “This approach needs to be cautious and very disciplined,” said Bruce McCrary, spokesman for the National Credit Counseling Foundation, a nonprofit credit counseling services group.
What is the expected interest rate for personal loans?
As of early August, the average interest rate for a three-year loan was 15.04%, up from 10.65% a year ago, according to Reuters. reliable, an online platform to compare rates and offers. The average five-year loan rate was 18.84%, up from about 15% a year ago.
These high prices discourage many consumers. According to TransUnion, 4.2 million personal loans were originated by lenders in the first quarter of this year, down more than 18% from the previous quarter and down 15.5% from the same period last year.
But Liz Pagel, senior vice president and consumer finance business leader at TransUnion, said the first quarter of 2022 will be a period of “unprecedented growth,” with financial institutions lending after the worst period of the pandemic. accelerated the composition of
Pagel said lenders withdrew their personal lending offers as inflation skyrocketed. “This is due to concerns about the economy and reduced demand from investors who normally buy these loans, many of whom are waiting for a more robust economic recovery.”
Then came the banking crisis triggered by the failure of Silicon Valley Bank in March last year. Financial firms continue to tighten their standards. Mortgage, auto and credit card denials hit the highest level in five years, according to the New York Fed.
Credit score is also important. People with the highest credit scores (661 to 720) earned a median annual interest rate of 19.8% when they got new credit cards in the fourth quarter of last year, according to TransUnion. The median interest rate for taking out a personal loan at the same time was 15.9%.
But if someone with a lower credit score (601-660) applied for a new credit card late last year, the median APR for the individual would be much higher at 20.2%, and the median interest rate would be 24.2. % is expected to be paid. Loan, added Transunion.
When does debt consolidation make sense?
LendingTree’s chief credit analyst Matt Schultz said people should try a 0% balance transition card before considering a personal loan. “If you have good credit and you can get zero percent remittances, it’s probably a better option than a personal loan,” he said.
No matter how you cut it, you won’t get a 0% offer on a personal loan. “It’s pretty hard to beat,” he said. As a caveat, he noted that he typically incurs a one-time fee ranging from 3% to 5% of the transfer balance.
One more caveat: the initial 0% rate is for a limited time only. APR may be slightly higher than other credit card offers. This means that if the cardholder fails to pay the full balance after the 0% rate expires, higher penalties will be imposed.
People can make a minimum monthly payment with a credit card, even though it’s expensive and not recommended. They are unable to pay the minimum loan repayment amount. “Unlike personal lines of credit, there is a definite date on which the loan will be paid,” McCrary said.
The extra spending power consumers gain by consolidating their credit card debt into personal loans could contribute to higher credit scores or, conversely, cause them to resume spending beyond their household budgets. there is.
According to TransUnion, consumers surveyed had used 59% of their median credit limit before taking out a personal loan to pay off their credit card debt, but 18 months later they had used their credit card. It has been reduced to 42% of the limit.
“It’s as nice as it can be to streamline things and pay just one bill instead of three or four,” Schultz said, “but it’s still nice to make new payments so you don’t end up with new personal loan payments.” We need to see if we can do it,” he said. You are in an even more difficult situation than you are already in. ”
