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Do You Have Too Much Debt?

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It may seem normal to have debt. After all, total household indebtedness in the U.S. hit a record high of $13.21 trillion as of March 2018.

While it seems like so many Americans carry debt, it may be hard to judge just how much debt is too much debt. There is no “right” amount of debt to have, nor is it easy to figure out how much debt is too much for the average person to handle.

“The appropriate amount of debt is a very personal question,” said Arielle Minicozzi, an executive financial planner at Sphynx Financial Planning. “What feels comfortable for one person may be overwhelming for another.”

There is a point when having too much debt, or too much of the wrong kind of debt can seriously harm your current and future financial situation. When you’re juggling different types of debts, it can be sometimes difficult to realize you have too much owed until it’s too late. We spoke with Minicozzi and other financial experts for their best tips to help tell when you have too much debt on your plate.

Good debt vs. Bad Debt

Debt — in most cases — should be avoided, according to the experts we spoke with. But, some debts make more financial sense to take on than others.

Good debts are debts that help you grow

Debts generally thought of as an investment in your future, like a student loan or a mortgage, are considered good debts. Good debt generally carries a low interest rate and has fixed payment terms, Dan Andrews, a CFP with Well-Rounded Success in Fort Collins, Colo., told MagnifyMoney.

“Our economy allows people to take on debt to pursue opportunities without having to save all the money upfront,” Andrews said. “Lots of people go to school, open businesses and get houses by leveraging debt.”

Andrews adds taking on those kinds of debts — the ones that help you improve your financial life — can be a great way to improve your overall wealth and accumulate assets through your career.

Bad debts slow financial progress

Sometimes we take on what are considered “bad” debts. Bad debts are generally unsecured by an asset and carry high-interest rates on variable terms, like credit cards.

If not managed properly, bad debt can stunt or reverse your financial progress.

“In a perfect world, you’d only use debt strategically because you’d be able to pay cash for everything, however, many of us do not have that luxury,” said Angela Moore, CFP and founder of ModernMoneyAdvisor.

Of course, even good debts can quickly turn into bad debts if you let them spiral out of control, or fall on hard times and struggle to pay them off. For example, you took student loans but did not earn a degree that would have increased your income, or if you took out an auto loan for a car you can’t afford. In these cases, a good debt suddenly becomes a true liability, putting your finances and even assets like your home or your car, at risk.

You can prevent this by being sure you have a healthy emergency fund saved for lean times, and hold yourself back from taking on more debt than you can afford in the first place.

– View this article to get more information on good debt vs. bad debt!

5 warning signs you have too much debt

Beyond just the good and bad, you don’t want to realize you’re in over your head with the debt you’re responsible for paying back. Here are a few warning signs that may indicate you’re getting to that point.

1. You can’t get peace of mind

Minicozzi said the first sign you have too much debt is that you’re feeling overwhelmed and stressed by your bills. If you get anxious at the thought of looking at your balances, and managing your finances is affecting your peace of mind, that’s a red flag you may have bitten off more you can chew.

2. You’re diverting money from your goals

If your other financial goals are suffering, it may be time to make a change. For example, a red flag would be if you are diverting funds away from important goals like retirement savings month after month.

“Once you get to that point, it’s a good sign you need to have an honest conversation with yourself about your repayment strategy,” said Minicozzi.

3. You have no strategy to pay off your debt

If you have a number of debts, you may be making payments each month. But you may not have in place a strategy for finally paying off your debts. If you don’t have a plan that pays off your debts in full, you may have more than what’s manageable for you, according to Moore.

4 You’re not making any progress

Kristi Sullivan, a Denver.-based financial planner at Sullivan Financial Planning, said a main red flag is that you are not making any progress paying down the principal. You are only making the minimum payments, which is just paying off interest each month.

5. The numbers just don’t add up

Looking at a few key numbers may help you point to the conclusion that you have too much debt on your hands for your comfort level. The following are suggested benchmarks and ratios the experts we spoke with suggest you consider when trying to figure out if you have too much debt.

Here are five numbers to check.

 

Your debt-to-income ratio

“A good rule of thumb is that your total debt payments, including a housing payment, should be no more than 40% of your monthly income,” said Minicozzi.

 

Your credit score

“Your credit score allows you to put a number on how responsible you are in the bank’s world. The higher the number, the more responsible possible lenders feel you are to repay the loan; so good job to you for being responsible,” said Andrews. Good credit is considered a FICO score of 670 or higher.

 

Your credit utilization

A high credit utilization ratio — which measures the overall credit limit you are using up — can indicate you’re leaning on your credit cards too much to make ends meet. The utilization ratio is the second most important factor in determining your credit score so reducing your utilization could improve your score, too.

“As far as maximizing your credit score, keeping balances on your cards below 20%-30% of their limits is ideal,” said Minicozzi.

For example, if your overall credit limit on all of your accounts is $10,000, your goal would be to use less than $3,000 of your balances on those cards.

 

Your net worth

Your net worth is just a step further than your debt-to-income ratio. If your net worth is negative and you own valuable assets, it may be an indication you should focus on paying down your debt to bring that number into the positive.

 

Your housing expense

Housing is the largest expense for most households, and a necessary one. A mortgage is considered good debt, or even an asset by some. On the other hand, a mortgage you can’t afford could leave you with too little left over to cover other bills and savings. Moore advised you pay no more than 28% of your gross income on housing.

Action steps to take if you have too much debt

After you’ve found you have too much debt, you can start planning to pay it off.

Create a budget

“While some people are in debt due to factors outside of their control such as medical expenses, mostly it is because of choices that now require sacrifices to reverse. Get ready for life to change, at least while you are digging out of debt,” said Sullivan.

Find expenses to trim

“You may be living in too nice of a house or apartment and need to adjust your living situation. Roommates or a less desirable area of town to cut down on housing costs can free up big chunks of cash to pay down debt,” said Sullivan. She added downgrading your car choice (changing to a car that costs you less to own and/or maintain) will lead to lower taxes and insurance costs on transportation.

Make a debt payoff plan

With your unsecured debts, you can employ one of two debt paydown methods: the debt snowball and the debt avalanche.

When you snowball debt, you order all of your debts by balance and prioritize paying off the account with the lowest amount first. If this method suits your personality, paying off lower balance loans may motivate you to pay off the remainder of the debt.

The avalanche approach has you order your debts by order of interest rate. Prioritize paying off the account balance with the highest interest rate while still making minimum payments on the other debts. The avalanche method saves you money in the long run since you can avoid paying the most interest and address the principal of your debt faster.

Whatever you do, don’t “wing it” with debt repayment, Andrews said, “A ‘winging it’ mentality can snowball out of control, especially if there is credit card debt.”

Try consolidating your debts

If you find it’s difficult to manage several debt payments each month, debt consolidation can help to simplify your debt payoff process. Debt consolidation can combine multiple debts — like credit card debt, auto loans, medical debt and student loan debt — into a single debt with one monthly payment. In some cases, consolidating your debts could even save you money on future interest payments as you pay down the balance.

Two common debt consolidation methods are to use a personal loan or balance transfer credit card.

If you use a personal loan for debt consolidation, you’d pay off other debts using the cash you’d receive from the personal loan, then pay down the personal loan in monthly installments.

When you use a balance transfer credit card, you can transfer the balances on your credit cards to another credit card with a 0% intro APR. Intro offers typically last from six to 18 months.

Ask for help

If you’re struggling to repay the debts and stay consistent, you may want to reach out to a credit counseling service or a financial planner to help you create a budget and debt repayment plan that works best for your financial needs.

“As long as you can pay your bills without sacrificing your long-term goals and as long as you aren’t stressed out over the level of debt you have, you’re in a good spot,” said Minicozzi.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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The Fastest Way to Pay Off $10,000 in Credit Card Debt

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Before you read on, click here to download our FREE guide to become debt free forever!

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Updated – March 20, 2019

Digging out of credit card debt can feel frustrating, intimidating and ultimately impossible. Fortunately, it doesn’t have to be any of those things if you learn how to take control.

Paying down debt is not only about finding the right financial tools, but also the right psychological ones. You need to understand why you racked up credit card debt in the first place. Perhaps it was a medical emergency or a home repair that needed to be taken care of immediately. Maybe you’d already drained your emergency fund on one piece of bad luck when misfortune struck again. Or maybe you’re struggling with a compulsive shopping problem, so paying down debt will likely result in you accumulating more until the addiction is addressed.

You also need to understand what motivates you to succeed. Do you want to pay down your credit card debt in the absolute fastest amount of time possible that will save more money or do you want to take some little wins along the way to keep yourself motivated?

Here’s a couple strategies consider as you learn the best way to handle credit card debt — and pay it off quickly.

2 common credit card debt repayment strategies

These repayment strategies can help you pay off credit card debt quickly. Keep in mind, you can use these strategies even for non-credit-card debt:

  • Debt avalanche: Focus on paying off the credit card with the highest interest rate first. Then, work your way down. This strategy can save you money on interest and get you out of debt sooner.
  • Debt snowball: Pay off your smallest debts first. Doing so can motivate you to continue making payments as you climb out of debt.

You don’t necessarily need to pick the repayment strategy that gets you out of debt the fastest. After all, if your repayment strategy doesn’t keep you motivated, you may not stick to it.

Using a personal loan or balance transfer credit card

As you seek to repay your debt, you could consider a personal loan or balance transfer credit card with a lower interest rate than on your existing debt. Transferring your debt to one of these financial products could help you reduce long-term interest costs.

But you’ll first need to learn whether or not you’re eligible. Your credit score will play a big role in determining your eligibility for a personal loan or balance transfer card. Use our widget below to figure out if a personal loan or a balance transfer is the best option for you!

What’s the best option for me?

Please enter information below and we’ll provide the best option to consolidate your credit card debt!

If you have a credit score above 640, you have a good chance of qualifying for a personal loan at a much lower interest rate than your credit card debt. With new internet-only personal loan companies, you can shop for loans without hurting your score. In just a few minutes, with a simple online form, you can get matched with multiple lenders. People with excellent credit can see APRs below 10%. But even if your credit isn’t perfect, you might be able to find a good loan to fit your needs.

Not sure what your credit score is? Click here to learn how and where to find out. If you know your credit score needs some work but not sure of what can be done, click here.

If you have a score above 700, you could also qualify for 0% balance transfer offers. We will talk more about balance transfers below but this option is the best way to pay off credit card debt if you’re able to qualify for a 0% APR balance transfer credit card.

A credit score of less than 600 will make it difficult for you to qualify for either option. If you have a credit score less than 640, struggling to make monthly debt payments and would like to explore your options to reduce your debt by up to 50%, then please click our option below to customize a personal debt relief plan.

Custom Debt Relief Plan

Now let’s talk about the financial tools to add to your debt repayment strategy in order to dig out of the hole.

Let’s say you have $10,000 in credit card debt, and are stuck paying 18% interest on it.

You already know that putting as much spare cash as you can toward paying down your debt is the most important thing to do. But once you’ve done that, so what’s next?

Use your good credit to make banks compete and cut your rates

You could save $1,800 a year in interest and lower your monthly payments based on several of the rates available today. That means you could pay it off almost 20% faster.

Here’s how it works.

Option One: Use a Balance Transfer (or Multiple Balance Transfers)


If you trust yourself to open a new credit card but not spend on it, consider a balance transfer. You may be able to cut your rate with a long 0% intro APR. You need to have a good credit score, and you might not get approved for the full amount that you want to transfer.

Your own bank might not give you a lower rate (or only drop it by a few percent), but there are lots of competing banks that may want to steal the business and give you a better rate.

Discover it® Balance Transfer

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Intro Purchase APR
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Intro BT APR
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Balance Transfer Fee
3%
Regular APR
14.24% - 25.24% Variable
Rewards Rate
5% cash back at different places each quarter like gas stations, grocery stores, restaurants, Amazon.com and more up to the quarterly maximum, each time you activate, 1% unlimited cash back on all other purchases - automatically.
Credit required
good-credit
Excellent/Good

Barclaycard Ring® Mastercard®

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Barclaycard Ring® Mastercard®

Annual fee
$0
Regular Purchase APR
14.24% Variable
Intro BT APR
0% intro APR for 15 months on balance transfers made within 45 days of account opening. After that, a variable 14.24% APR will apply.
Balance Transfer Fee
Promotional Balance Transfers that post to your account within 45 days of account opening: Either $5 or 2% of the amount of each transfer, whichever is greater.
Credit required
good-credit
Excellent/Good

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MagnifyMoney regularly surveys the market to find the best balance transfer credit cards. If you would like to see what other options exist, beyond Chase and Discover, you can start there.

promo-balancetransfer-halfIt also has tips to make sure you do a balance transfer safely. If you follow them you’ll save thousands on your debt by remaining disciplined.

You might be scared of a balance transfer, but there is no faster way to cut your interest payments than taking advantage of the best 0% or low interest deals banks are offering.

Thanks to recent laws, balance transfers aren’t as sneaky as they used to be, and friendlier for helping you cut your debt.

Sometimes the first bank you deal with won’t give you a big enough credit line to handle all your credit card debt. Maybe you’ll get a $5,000 credit line for a 0% deal, but have $10,000 in debt. That’s okay. In that case, apply for the next best balance transfer deal you see. MagnifyMoney’s list of deals makes it easy to sort them.

Banks are okay with you shopping around for more than one deal.

Option Two: Personal Loan

If you never want to see another credit card again, you should consider a personal loan. You can get prequalified at multiple lenders without hurting your credit score, and find the best deal to pay off your debt faster.

Personal loan interest rates are often about 10-20%, but can sometimes be as low as 5-6% if you have very good credit.

Moving from 18% interest on a credit card to 10% on a personal loan is a good deal for you. You’ll also get one set monthly payment, and pay off the whole thing in 3 to 5 years.

Sometimes this may mean a higher monthly payment than you’re used to, but you’re better off putting your cash toward a higher payment with a lower rate.

And you’ll get out of debt months or years faster by leaving more money to pay down the debt itself. If you want to shop for a personal loan, we recommend starting at LendingTree. With a single online form, dozens of lenders will compete for your business. Only a soft credit pull is completed, so your credit score will not be harmed. People with excellent scores can see low APRs (sometimes below 6%). And people with less than perfect scores still have a good chance of finding a lender to approve them.

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Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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Are Balance Transfers the Best Way to Pay Off Debt?

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When you’re buried under a pile of debt, you’ll need to go beyond making the minimum payments if you hope to get debt-free as quickly as possible. And with interest rates on an upward swing, it may not be something you can afford to ignore.

This is where balance transfer credit cards come into play. Once you understand how they work, they can be a powerful tool that lets you temporarily pause your interest payments — and chip away at your principal balances faster.

MagnifyMoney tapped the experts to unpack everything you need to know about balance transfers. Here’s how to master the ins and outs of one of the most effective debt repayment options available.

What is a balance transfer?

It’s all in the name. A balance transfer involves taking one or more credit card balances and transferring them to a different card that has a lower interest rate. The ideal situation is to roll everything over to a card that has a 0% APR promotional period. This essentially eliminates the interest for a set period, giving you a chance to catch your breath and, if all goes according to plan, pay off the balance before the interest kicks in.

To pull off a balance transfer, you can either open a new low- or no-interest credit card, or look to your existing cards that you’ve already paid off to see if there are any deals to be had. According to David Metzger, a Chicago-based certified financial planner and founder of Onyx Wealth Management, it isn’t uncommon to find 0% interest rate promotions on your existing cards.

“If you’ve got multiple cards, chances are you get offers like that all the time,” he said.

If not, don’t be afraid to reach out to your credit card companies to see if they have any deals up for grabs. If they don’t, or you don’t have the credit capacity on your existing cards, you can shop online for a balance transfer card.

As for the promotional introductory period, it varies from offer to offer, with the best rates and terms generally going to those who’ve got excellent credit. Those with a minimum credit score of 680 can expect transfer periods that last anywhere from 12 to 21 months. Keep in mind that some offers tack on a balance transfer fee to the tune of 0% to 4%, so it pays to read the fine print.

How balance transfers can save you money

Temporarily eliminating your interest rate can translate to pretty significant savings. Let’s say you have the following open balances, and you pay $100 per month on each:

  • $1,000 with 18.00% APR
  • $2,000 with 16.00% APR
  • $800 with 20.00% APR

If you stay on this path, you’ll shell out $500 in interest and get out of debt in 24 months. But a balance transfer with 0% APR for 15 months will keep that $500 in your pocket. Your monthly payment won’t change, and you’ll also pay off the balance nine months faster. From a numbers-and-sense perspective, it’s a no-brainer.

“You can save a ridiculous amount in interest payments, but the name of the game is to more or less come close to paying the balance off completely before that transition over to that higher interest rate,” Lucas Casarez, a Fort Collins, Colo.-based certified financial planner and founder of Level Up Financial Planning, told MagnifyMoney.

Applying for a balance transfer credit card

As Metzger mentioned, turn first to any existing credit cards that can absorb some new debt. Are there any balance transfer offers available? If not, the best place to search and compare balance transfer offers is online. According to Casarez, the following factors play the biggest role in the kinds of deals for which you’ll be eligible:

  • A good credit score: You won’t qualify for much if your credit score is below 680. At the time of this writing, the longest promo periods with 0% interest were reserved for this bunch. Why? A lower credit score is a red flag to credit card companies that you may be a risky borrower.
  • Reliable income: Your credit score doesn’t stand alone. “You could have the best credit score in the world, but lenders still want to know that you have the ability to pay your bill,” Casarez said.

He adds that folks in retirement, for example, may have a tougher time qualifying for a worthwhile balance transfer since their money may come more from retirement accounts rather than Social Security or pensions. Casarez does clarify, however, that credit card companies typically want to approve you.

“These banks make a lot of money the longer that your current balance is at a higher interest rate,” he said.

Discover it® Balance Transfer

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Rates & Fees

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Discover it® Balance Transfer

Regular APR
14.24% - 25.24% Variable
Intro Purchase APR
0% for 6 months
Intro BT APR
0% for 18 months
Annual fee
$0
Rewards Rate
5% cash back at different places each quarter like gas stations, grocery stores, restaurants, Amazon.com and more up to the quarterly maximum, each time you activate, 1% unlimited cash back on all other purchases - automatically.
Balance Transfer Fee
3%
Credit required
good-credit
Excellent/Good

Barclaycard Ring® Mastercard®

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on Barclays’s secure website

Terms & Conditions

Barclaycard Ring® Mastercard®

Annual fee
$0
Regular Purchase APR
14.24% Variable
Intro BT APR
0% intro APR for 15 months on balance transfers made within 45 days of account opening. After that, a variable 14.24% APR will apply.
Balance Transfer Fee
Promotional Balance Transfers that post to your account within 45 days of account opening: Either $5 or 2% of the amount of each transfer, whichever is greater.
Credit required
good-credit
Excellent/Good

Wells Fargo Platinum Visa Card

The information related to Wells Fargo Platinum Visa Card has been collected by MagnifyMoney and has not been reviewed or provided by the issuer of this card prior to publication.

Wells Fargo Platinum Visa Card

Intro Purchase APR
0% for 18 months
Intro BT APR
0% for 18 months
Regular Purchase APR
17.74%-27.24% (Variable)
Annual fee
$0
Credit required
good-credit
Excellent/Good

3 questions to ask before transferring your debt

If you’re looking to save money and get out of debt faster, balance transfers are a powerful weapon to have in your arsenal — if you know how to use them wisely. Here’s what to consider before giving it a go.

1. Do you understand why you’re in debt?

This strategy won’t work if you don’t get to the root of why you’re in debt to begin with. What kinds of purchases make up the bulk of your existing credit card statements? Whether they’re living expenses, splurges or surprise pop-up bills, it’s time to revisit your budget to prevent falling into the same patterns again. After your balance transfer is complete, seeing $0 balances on your old credit cards can create serious temptation.

“If you don’t have a plan, balance transfers may be something that allow you to spend even more money, so it could put you further into the hole,” Casarez said. “It’s like a hot potato you’re passing around, but there’s going to come a day when you have to pay up.”

Having emergency savings on hand provides an additional safety net because you won’t need a credit card to see you through your next unexpected bill. Our insiders recommend building a $1,000 mini-emergency fund while you’re paying off debt.

2. Can you pay off your debt before the introductory period ends?

Once your budget and emergency fund are in shape, it’s time to shop around online for balance transfer offers. Ones with the lowest transfer fees and longest 0% introductory periods are the best, but here’s the catch: This strategy only makes sense if you can pay off the balance before that period ends, at which point you’ll be slammed with interest charges on the remaining balance.

Standard interest rates after the introductory promo period ends are generally higher than other credit cards. And if you miss a payment, the credit card company may cancel your promo period.

3. Are you OK with taking a short-term credit hit?

Opening a new balance transfer card requires a hard credit inquiry, which will result in a short-term dip in your credit score. Your score may also take a small hit if the transfer itself uses up more than 30% of your new credit line. (How much you owe accounts for 30% of your FICO score.) But Metzger said it may be worth it if you’re ultimately eliminating high-interest debt faster.

“Your score will improve much faster than it would have had you not engaged in the strategy,” he said. “You take a small step backward for a huge step forward, if you’ve got the discipline to do it.”

Metzger does suggest using caution with balance transfers if you plan on financing a big purchase, such as a mortgage or car, within the next month or two. Depending on your financial health, slight fluctuations in your credit score could prevent you from getting the best interest rates on these purchases.

3 alternatives to a balance transfer

If a balance transfer isn’t in the cards for you right now, there are still plenty of viable ways to get out of debt as quickly as possible. Here are a few tried-and-true debt repayment methods you can put to use today.

1. Debt snowball method

The debt snowball approach prioritizes your lowest balance first, regardless of your interest rates. You make the minimum payments on all your debts while hitting the lowest balance the hardest with any extra income you can spare. Once it’s paid off, you take whatever you were spending there and roll it over to the next lowest balance. Keep on chugging along until all your balances are paid off.

“The nice thing about the debt snowball, and the reason that it tends to be the most effective way, is that you start to have those wins a lot faster when you’re focusing on those smaller balances,” Casarez said.

“You start to build up some momentum and confidence,” he added. “As you do that, you start to get a little bit more swagger and feel like you’re actually making progress and have more control over your financial situation than you thought.”

2. Debt avalanche method

This strategy puts your highest-interest balance above all others. When you compare it to the debt snowball method, it’s the fastest and cheapest way to get the job done, which is why Metzger said it makes the most sense.

“With that being said, people are quirky,” he added. “If paying down the lowest balance and snowballing it that way works for you, then by all means do it. The outcome is far more important than the path you take to get there.”

3. Debt Consolidation loan

Another way to tackle your debt is to consolidate it using a personal loan. Once you receive the loan amount, you use the funds to pay off all your debt, at which point you’ll have one new balance and monthly payment. This strategy is ideal for those who can lock down a lower interest rate. What’s more, personal loans often have fixed rates, monthly payments and repayment timelines, so it makes budgeting a whole lot easier.

And since it’s a lump-sum installment loan — not a revolving credit line in which you can charge and pay off as you go — using it to eliminate credit card debt should boost your credit score because you’re effectively using less available credit. Some personal loans do come with an origination fee, typically between 0% and 6%, so do the math to see if it’s the right debt consolidation method for you.

When shopping for a debt consolidation loan, it’s best to compare your option to make sure you get the one with the lowest interest rate. LendingTree, the parent company to MagnifyMoney, allows you to compare up to five lenders without affecting your credit score. Use our table below to get the best results!



Compare Debt Consolidation Loan Options

Which is the best way to pay off debt?

It all depends on your situation. If you’ve got a solid credit score and qualify for attractive balance transfer offers, it’s worth exploring — as long as you don’t charge new debt and you’ve got a plan in place for paying off the balance before the introductory period ends. When done right, balance transfers are great shortcuts that could save you a significant amount of time and money in the long run.

The debt snowball and avalanche methods are worthwhile alternatives for those who prefer to get out of debt the old-fashioned way. Meanwhile, a debt consolidation loan could pave the way for a locked-in lower interest rate. The main takeaway here is that you have multiple debt repayment options at your fingertips. They’re all, as the old saying goes, “Different paths up the same mountain.”

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Marianne Hayes
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Marianne Hayes is a writer at MagnifyMoney. You can email Marianne here

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