Here’s what you need to do to pay off that big credit card debt
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This is yet another example of how the economic recovery from the pandemic has been uneven: while overall credit card debt is going down, others see their balances explode in huge numbers.
Money Management International, a nonprofit credit counseling agency, recently analyzed the credit card balances of tenants who requested financial assistance with them. Renters have been particularly hard hit by the pandemic, and federal aid allocated by Congress to deal with their crisis has been painfully slow to reach households. More than a third of Americans are tenants.
The typical tenant seeking help from the agency had around $ 3,000 in credit card debt in 2019, International Money Management found. The average balance to date in 2021 is closer to $ 25,000.
Other agencies that help people in financial difficulty report the same.
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“We see people who have $ 20,000, $ 30,000 and $ 40,000 in credit card debt,” said Bruce McClary, spokesperson for the National Foundation for Credit Counseling.
Balances this high can take decades to pay off, experts say.
If someone made only the minimum monthly payments on a credit card with a balance of $ 25,000, charging the average annual rate of 16.22%, it would take them almost 30 years to get rid of that debt, and he will have paid more than $ 32,500 in interest at the end, according to an example provided by Ted rossman, Industry Analyst at CreditCards.com.
The minimum payment on that balance would start at around $ 588 per month and decrease over time as the balance decreases.
One way to speed up the repayment, Rossman said, would be to continue paying the higher initial minimum payment.
“This would reduce their repayment period to just over five years,” he said. “And their interest charge would be $ 12,443.”
For people who owe such large balances, Rossman recommends contacting a nonprofit credit counselor. International Money Management, Green Way and other members of the National Foundation for Credit Counseling are options.
“They can provide helpful advice and negotiate with creditors on your behalf,” Rossman said.
For example, he said it’s common for people to get a more manageable repayment plan, through credit counseling, “something like a 7% five-year interest rate.”
Under these fixed terms, a person making payments on a balance of $ 25,000 would be debt-free in five years and pay only $ 4,700 in interest.
Be prepared for some credit counselors to charge a fee for their help, although those costs are usually worth it when you consider the interest they can save you from paying, experts say.
Another option for people with good credit is to take out a personal loan to pay off your credit card debt, Rossman said.
You will still be required to make monthly payments, but hopefully for less time as the interest rates on personal loans can be as low as 5% or 6%, compared to annual fees of 16% or more on credit cards.
Those with good credit can also transfer their debt to a 0% balance transfer card.
These cards give you a number of months in which no interest is charged. If you have found one with a period of 20 months, and paid $ 1,250 a month, for example, your $ 25,000 balance would be gone in less than two years.
“Be careful, the interest rate varies from 14.49% to 24.49% after the promotion ends at 0%,” Rossman said.
Many are also probably waiting for the economic recovery to hit them so that they can pay off their debts in a meaningful way.
“More often than not, the people we see have financial problems far beyond their control,” McClary said. “Much of the expense that takes place is out of necessity.”