Advertiser Disclosure

Pay Down My Debt, Strategies to Save

Real Stories of an Emergency Fund Saving the Day

Editorial Note: The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Real Stories of an Emergency Fund Saving the Day

It’s common personal finance advice to build an emergency fund – an easy-to-access account with enough money to cover your expenses for three to six months. How to get started and where to keep the money might be up for debate. Some people may even go back and forth about what qualifies as an emergency. But, as the stories below demonstrate, the value of having an emergency fund is certain.

Hold Out and Get What You’re Owed

A user on Reddit shared an experience when an emergency fund led to a substantial financial gain. His wife lost her job, and the company owed her an undisclosed but large sum of money. The company offered her a payment worth 20 percent of the amount owed, but because the couple had a six-month emergency fund ready, they didn’t feel rushed to accept. Instead, they hired a lawyer, sued the company, and eventually got the full amount owed to them.

The wife also found a new, better job within two months and they only had to use about 20 percent of their emergency fund during the transition.

A commenter on this thread points out that similar situations can happen after auto accidents. The commenter says their ex was a claims adjuster and would push to close a case as quickly as possible. Once there’s a settlement the case won’t be reopened, even if you discover a new injury. Those that need the settlement money right away might agree to the rushed closing while those with an emergency fund can wait a little while to see if they discover new bodily pains or damage to their vehicle.

[Creating an Emergency Fund While Saddled with Debt]

A Car Accident

A car can be an essential part of life, especially if you need one to get to work or school. Melanie Lockert, Founder of Dear Debt, says, “When I was living in LA and got in a car accident, I had an unexpected $1,800 repair bill. My emergency fund turned my expense into an annoyance rather than a crisis.”

Keeping accidents from becoming financial crises is one of the largest benefits of having an emergency fund.

Untimely Travel

Some emergency situations are more serious than others. A damaged car or a lost job can set you back, but the death of a loved one can be an emotional and financial blow. Jessica Garbarino, Founder of personal finance website Every Single Dollar, only had a small emergency fund while she was paying down debts. On New Year’s Eve, she got a call that her grandfather wasn’t doing well. Although the savings account wasn’t much money, her fund could cover the cost of a last-minute plane ticket from Florida to Minnesota, and she was able to spend a few precious days with her grandfather before he passed away.

[Should You Invest Your Short-Term Savings]

A Little Bit of Everything

Another Redditor dealt with several emergencies back to back. Over a five-month period, he had a kidney stone removed, which set him back about $5,000, and was hit by a car, adding another estimated $1,200 to $1,500 to his tab. His car got backed into, a rock hit his windshield, he needed new brake pads, and he did some other general service to his car. In total, he’s estimating the cost came out to be around $10,000 including the lost wages from taking time off work. But, his emergency fund was beyond six months of expenses and he optimistically writes, “Having the cash on hand? Priceless.”

How to save while paying down debts

Unfortunately, emergencies do happen. But, as the four scenarios above exemplify, one of the most powerful things an emergency fund can give you are options. You can choose to travel at a moment’s notice, hold out for a fair and full settlement, or repair a vehicle right away – and get to do so without going into debt.

But, what if you’re in the process of paying down debt? How do you decide when it makes sense to put money towards your debt rather than contribute to an emergency fund?

One option is to start small and aim for building a $500 to $1,000 fund while making debt payments. You may only be able to put aside a little money each month, but those savings do add up and a small cash reserve can be enough to get you out of some sticky situations. You can also use a year-end bonus, tax refund, gift, or other influx of money to jump-start an emergency fund.

Grayson Bell, Founder of Debt Roundup, shares his method for paying off debt while building savings. He started by putting 95 percent of his disposable income to debt payments and 5 percent towards savings. After some time, he adjusted his allocation and put 80 percent towards debt and 20 percent towards savings. He suggests creating your own milestones that trigger change.

Some people will forgo an emergency fund, or saving of any kind, while paying off debt in the hope of getting back in the black quickly. For Grayson, one important reason to start saving was to change his mindset around money. Beginning to regularly save, rather than spend money on himself or his debts, was an important part of getting his finances in order.

Advertiser Disclosure: The card offers that appear on this site are 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 card companies or all card offers available in the marketplace.

Louis DeNicola
Louis DeNicola |

Louis DeNicola is a writer at MagnifyMoney. You can email Louis at louis@magnifymoney.com

TAGS: ,

Get A Pre-Approved Personal Loan

$

Won’t impact your credit score

Advertiser Disclosure

Pay Down My Debt

Credit Card Consolidation Loans

Editorial Note: The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

If you’re having a hard time paying down your credit card debt, you may want to consider consolidating with a credit card consolidation loan, better known as a personal loan. This is one strategy that can help give you the extra time you need to pay down several debts, especially if you’re struggling to manage multiple monthly payments. If you’re able to find a credit card consolidation loan with a low APR, you’ll be able to slash your interest charges, too, and potentially pay your debts off even faster. Use our comparison widget below to find the best loan for you!



Compare Credit Card Consolidation Loans

That being said, taking out a loan to pay off a credit card is not always the best option for everyone. It’s smart to consider the pros and cons to help determine whether a credit card consolidation loan is right for you.

In this article, we’ll cover everything you need to know about consolidating your credit debt with a loan.

What is a credit card consolidation loan?

A credit card consolidation loan is a personal loan that can be used to consolidate your credit card debt. An unsecured personal loan allows you to take out money without collateral. However, these loans can sometimes have higher interest rates because they are a risk to lenders. These types of loans can provide a fixed loan amount (what you want to borrow) with a fixed monthly payment and a fixed term. This helps you to know what you’ll pay each month and how long it will take to pay off the loan.

Personal loans can also have fixed-interest rates, meaning they won’t likely change throughout the length of your loan. These rates usually depend on your credit history. Those with good credit can usually receive lower rates than those with poor credit.

When should you consolidate?

People consolidate for many reasons and at various times. However, high-interest rates on current debt can be a major deciding factor. A credit card debt consolidation loan can possibly offer lower interest rates and provide one easy monthly payment.

Paying off your balance can often seem impossible, especially when you’re only making minimum payments each month. This might be a good time to consider consolidating your debt. With a credit card consolidation loan, you have a set period of time to pay off your debt (unlike with a credit card) so you can possibly get it paid off sooner.

If you consolidate your credit card debt with a loan, that debt is paid off. You no longer need to worry about high-interest rates and fees on your credit card accounts. Instead, you’ll only have one monthly loan payment to focus on.

While there are many good reasons to use a  loan to consolidate your debt (we will get to a couple below!), there are times when this might not be ideal. For example, if you don’t have enough income to cover the cost of your loan payment each month or if you have extremely high debt-to-income ratio, taking out a loan may not be the best option.

Why should I pay off a credit card with a loan?

There are many benefits when consolidating your credit card debt with a loan.

  • Have one monthly payment instead of multiple payments, and can possibly receive a lower interest rate and lower monthly payment.
  • Have a fixed term to pay off your loan so you can get your debt paid down faster.
  • Without several accounts to worry about each month, you can focus on paying just one.
  • By having a fixed monthly rate on a fixed schedule, you can get in the habit of paying your bill on time every month, which can help improve your credit score.
  • A loan can also help minimize your credit utilization rate. This is the rate that determines how much of your credit limit you utilize and is one of the major determining factors for your credit score. To retain a good credit score, your credit utilization rate should remain below 30%.
  • You’ll also improve your score by adding an installment loan to your credit report. Credit mix is part of calculating your credit score and it’s good to have a variety of revolving credit types.

How to qualify

When applying for a credit card consolidation loan, lenders look at certain aspects, including credit history and income. You’ll be more likely to qualify for a lower rate if you have good credit. If your credit is poor, you may want to consider a cosigner with good credit.

The lender also takes into consideration your income level to ensure you have the finances to pay your loan. Most lenders look for borrowers that have a lower debt-to-income ratio, so they know borrowers have the funds to pay.

Fees and fine print to watch out for

While consolidating your debt with a loan can be smart, it’s not perfect. There are certain things to watch out for, including fees, penalties and the annual percentage rate (APR), which can vary with each lender.

Origination fee. Some lenders may charge an origination fee of 1% to 8% to process your personal loan application. This type of fee is generally included in the APR and deducted from the loan amount. That means if you borrow $10,000 and you’re charged a 2% origination fee, you’ll walk away with a loan of $9,800. An origination fee can be a percentage of the loan amount itself or charged as a flat rate.

Rates. The annual percentage rate (APR) is usually based on the borrower’s credit score. If a borrower has good credit, there is a better chance of receiving a lower rate. It’s essential to shop around to find the best rate for your needs.

Prepayment penalties. While most lenders don’t charge a prepayment penalty, it can happen. This is a fee to the borrower if they decide to pay off their personal loan early.

Precomputed interest. A certain way some lenders calculate interest on a personal loan that can have you paying a higher interest rate if you pay off your loan before the term is up.

Credit card consolidation loan vs. balance transfer

Consolidating your credit card debt with a credit card consolidation loan might be a good option, but it’s important to look over all other prospects to know for sure.

 Credit Card Consolidation LoanBalance transfer

Types of debt you can consolidate

Personal loans can be used to pay off different types of unsecured debt, including medical bills not covered by insurance, along with credit cards.

Credit card debt only. Can’t transfer debt from cards of the same issuer.

Credit required

Bad-excellent

Good

Rates

Up to 35.99% or higher depending on credit/lender

0% intro APR; variable APR once promo period ends

Term lengths

24-84 months

Promo periods typically last 12-21 months; balance can revolve indefinitely after that.

Fees

1%-8% origination fee; some lenders charge no origination fee.

3%-5% balance transfer fee; some offers do not charge a fee.

– Learn more about using a balance transfer to pay down debt here

Shopping for credit card consolidation loans online

Finding consolidation loan offers online is a relatively easy process and you’ll be able to compare different options all at once.

How to find them
Get started by having a firm grasp on how much you want to borrow and the amount of time you’ll likely need to pay back your loan. Keep an eye on your credit history so you know your score and can attest all information is correct.

Search and compare credit card consolidation loans online with the help of our easy-to-use online comparison tool at the top of this article. You can shop different borrowers at once with only a soft credit inquiry that will not impact your score.

LendingTree, our parent company, also has a convenient debt consolidation calculator that can help determine your estimated monthly payments by simply entering your consolidation loan amount.

What to compare
When shopping for a credit card consolidation loan, it’s important to compare the rates to find the best one that fits your budget. You want to ensure you’ll be able to pay for the monthly payments and that you are getting a better rate than the one you already have with your credit cards. You’ll also want to keep an eye on the loan terms and the loan amounts offered as each can vary. It’s also important to look for any possible fees, including origination fees that can sometimes be tacked onto personal loans.

Consolidating your credit card debt with a loan may be a good idea, but it’s smart to do extensive research to make certain it’s the right choice for you.

Advertiser Disclosure: The card offers that appear on this site are 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 card companies or all card offers available in the marketplace.

Carissa Chesanek
Carissa Chesanek |

Carissa Chesanek is a writer at MagnifyMoney. You can email Carissa here

TAGS:

Get A Pre-Approved Personal Loan

$

Won’t impact your credit score

Advertiser Disclosure

Pay Down My Debt

Debt Consolidation vs. Bankruptcy – Which Option is Better?

Editorial Note: The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

iStock

If you feel as if you are drowning in your debts, you may already be considering options for assistance, like one of several debt consolidation methods or filing for bankruptcy. The assistance you ultimately turn to will heavily depend on the severity of your financial situation. If you’re choosing between debt consolidation and bankruptcy, you are comparing options that vary greatly in cost, complexity and risk.

“Every possible option should be thoroughly researched, and no quick decisions should be made,” said Martin Lynch, director of education at Cambridge Credit Counseling in Agawam, Mass. “It usually takes a long time to get into debt trouble, and the process to unwind those debts should also involve patience and consideration before you commit to any option.”

What is debt consolidation and how does it work?

  • Personal loans
  • Balance transfer credit cards
  • Home equity loans
  • Home equity lines of credit

When you consolidate debts, you essentially roll multiple debts into one. A new loan or line of credit is used to pay off previous debts, leaving you to manage one monthly payment. Popular debt consolidation products include personal loans, balance transfer credit cards, home equity loans and home equity lines of credit.

Ideally, the consolidation loan will have more favorable terms than existing debts, like a lower interest rate or monthly payment. In addition, consolidating debts could help reduce the number of bills a borrower is responsible for keeping up with.

What is bankruptcy and how does it work?

  • Chapter 7
  • Chapter 13

Bankruptcy is a federal protection that helps individuals and businesses who cannot afford to repay their debts. Bankruptcy can eliminate consumer debts and may help debtors repay what they can through court-approved debt repayment plans. The law allows individuals to file for either Chapter 7 (liquidation) or Chapter 13 (repayment) bankruptcy.

Chapter 7 bankruptcy is referred to as liquidation bankruptcy because a borrower may have to sell some of their assets to pay off their debts. In Chapter 7, any of the borrower’s assets that are not exempt from sale under law may be sold by a court-appointed trustee or turned over to creditors to settle debts. Most other debts are discharged, with some exceptions (more on that in a minute).

In a Chapter 13 filing, a court approves a repayment plan that lets the borrower repay their creditors over three to five years. Any remaining amount owed on the debts will be discharged after all payments are made under the repayment plan.

Some debts, like most student loans, most tax obligations, child support, alimony and court and criminal fines are not eligible for discharge in bankruptcy.

Comparing debt consolidation and bankruptcy

Here’s a comparison of debt consolidation and bankruptcy.

Qualifications

Debt consolidation

  • A FICO credit score of at least 600
  • A low debt to income ratio below 40%
  • No recent bankruptcies

Bankruptcy

Chapter 7
You must complete credit counseling within the six months prior to filing for bankruptcy, as well as a post-bankruptcy debtor education course for debts to be discharged.

You must also pass a “means test” for eligibility:

  • Your monthly income must be below the median state income, based on family size.
  • Your disposable income isn’t enough to satisfy your debt obligations.

Chapter 13
You must complete credit counseling within the six months prior to filing for bankruptcy, as well as a post-bankruptcy debtor education course for debts to be discharged.

  • Secured debt (e.g. mortgages and auto loans) must not be worth more than $1,184,200 total
  • Unsecured debt (e.g. credit cards and medical bills) must not exceed $394,725

What debts qualify?

Debt consolidation

Existing debts such as:

  • Credit cards
  • Medical bills
  • Utility bills
  • Payday loans
  • Student loans
  • Taxes
  • Bills in collection

Bankruptcy

Chapter 7
A bankruptcy trustee or bankruptcy court liquidates nonexempt assets sufficient to repay creditors.

Chapter 7 bankruptcy may result in discharge of the following existing debt:

  • Credit cards
  • Personal loans
  • Medical bills
  • Utility bills
  • Payday loans
  • Bills in collection
  • Obligations under leases and contracts
  • Promissory notes

Certain items do not count toward your assets, including:

  • household goods
  • wedding rings
  • money in retirement accounts
  • medical supplies

Some assets are exempt under federal and state law, and exemptions vary by state. Federal bankruptcy law allows you to keep up to $15,000 of home equity and $2,400 of vehicle equity, so your home, vehicle and other assets could be protected under state or federal exemptions. But exemptions aren’t automatic — talk to a bankruptcy attorney in your area to understand what you’re at risk of losing.

Chapter 13
You can file for Chapter 13 if you have less than $394,725 in unsecured debts like credit cards and personal loans and less than $1,184,200 in secured debts like a mortgage or auto loan. Filing Chapter 13 may stop home foreclosures, though you must make timely mortgage payments during the Chapter 13 plan. You can also prevent repossession of some assets by restructuring secured-debt payments within the Chapter 13 repayment plan.

Chapter 13 bankruptcy may result in discharge of the following existing debt:

  • Credit cards
  • Medical bills
  • Utility bills
  • Payday loans
  • Student loans
  • Taxes
  • Bills in collection

A Chapter 13 bankruptcy discharge does not eliminate long-term obligations like a home mortgage. You will continue to pay the remainder of the obligation after the repayment plan ends.

Effect on credit score

Debt consolidation

You may see your credit score drop slightly, because applying for new credit generates a hard inquiry on your credit report and can shave a few points off your score.

However, you can expect your credit score to improve as you make on-time payments on your new loan.

Your credit score might actually improve in the short term if you pay off revolving debts (like credit cards) but keep the accounts open. Closing accounts lowers your credit limit, raising your credit utilization ratio — a major factor in credit scores — and in turn lowering your credit score. Not paying off debt or adding additional debt can also impact you negatively.

Bankruptcy

A study by LendingTree, the parent company of MagnifyMoney, found 43% of people with a bankruptcy on their credit file have a credit score of 640 or higher within a year of the bankruptcy, and that figure goes up to 65% two years post-filing — but you should expect your credit score to drop after filing for bankruptcy.

Bankruptcy is considered a very negative event and will cause serious damage to a filer’s credit score for as long as it remains on the credit report.

A Chapter 7 filing stays on your credit report for 10 years, while a Chapter 13 filing should fall off your report after 7 years.

The older negative information is, the less impact it will have on your credit score.

You may see accounts included in the bankruptcy filing removed from the report before the bankruptcy is removed. Any individual account that was included in the bankruptcy will be removed 7 years from its delinquency date.

The amount your score falls will vary depending on how many accounts are part of the bankruptcy and whether they were delinquent or charged off. Your credit score prior to bankruptcy also plays a factor in this — borrowers with higher credit scores prior to filing for bankruptcy can expect to see larger drops in credit score.

How it appears on your credit report

Debt consolidation

Balances on consolidated debts will decrease or be marked as paid off, and a new loan will be added to your credit report.

Bankruptcy

Chapter 7
Bankruptcy will drop off your credit report 10 years from the filing date. Accounts included in the bankruptcy will be removed 7 years from their delinquency dates.

Chapter 13
Bankruptcy will drop off your credit report after 7 years from the filing date. Accounts included in the bankruptcy will be removed 7 years from their delinquency dates.

Length of process

Debt consolidation

The time frame varies from several months to several years, based on the term of the debt consolidation loan.

Bankruptcy

Chapter 7
The entire process may take up to six months to complete.

Chapter 13
The legal process may take several months; the repayment period will last three to five years.

Cost

Debt consolidation

You will have to pay interest on your new loan, and rates vary widely by loan type.

Some personal loans may charge fees such as:

  • Loan origination fee
  • Prepayment fee
  • Loan credit insurance

Credit card companies may charge a fee to make a balance transfer between credit cards. A 3% balance transfer fee is common. With a balance transfer credit card, you may be able to transfer credit card debt to a card with a 0% APR on balance transfers for a limited time, but if you don’t pay off the balance during the 0% APR intro period, your debt may begin to accrue interest.

There may be fees associated with a HELOC or home equity loan such as:

  • An appraisal fee, to gauge the current value of the property
  • Application costs
  • Processing fees
  • Miscellaneous lender fees
  • Cancellation fee
  • Inactivity fee

Bankruptcy

Chapter 7

  • Filing fee: $245
  • Administrative fee: $75
  • Trustee fee: $15
  • Attorney: varies
  • Pre- and post-bankruptcy credit counseling/debtor education courses: about $50-$100 each

Chapter 13

  • Filing fee: $235
  • Administrative fee: $75
  • Convert Chapter 13 to Chapter 7: $25
  • Attorney: varies
  • Pre- and post-bankruptcy credit counseling/debtor education courses: about $50-$100 each

Generally, interest is not paid on unsecured debts. Interest on secured debts are paid through the Chapter 13 plan. How bankruptcy courts determine that rate varies by state, but the Supreme Court case Till v. SCS Credit Corp. provided guidance that the rate can be calculated as the prime rate plus 1.5%.

Tax consequences

Debt consolidation

None.

Bankruptcy

If you are owed a tax refund, the money may be delayed or the funds may be turned over to trustee.

Discharged debt is taxable as income, so if you have debts discharged you may need to set aside funds to pay the tax when the time comes.

Benefits

Debt consolidation

  • Avoid severe credit damage.
  • Improve your credit score over time.
  • There’s no risk of losing personal property with a personal loan or balance transfer credit card.
  • It may be easier to qualify for than bankruptcy.

Bankruptcy

Chapter 7

  • You can have most unsecured and secured debts discharged quickly, within 4 to 6 months.
  • You may not have to pay back the entire amount of what you owe.
  • By law, collections efforts have to stop.
  • Under state and federal law, you may be allowed to keep certain exempt property.

Chapter 13

  • You can pay back some of what you owe to creditors over 3 to 5 years.
  • Your remaining debts are discharged after completing the 3- to 5-year repayment plan.
  • You may not have to pay back the entire amount of what you owe.
  • Make one installment payment to a trustee, instead of managing multiple debts.
  • Save property like a house headed to foreclosure or vehicle about to be repossessed.
  • Save assets that would otherwise be sold in a Chapter 7 filing.
  • It may allow you to catch up on delinquent mortgage payments over time.
  • By law, collections efforts have to stop.
  • It protects cosigners from liability on consumer debts.
  • It may lower the monthly payment on secured debts.

Risks

Debt consolidation

Bankruptcy

Chapter 7

  • Because of the credit score damage caused by bankruptcy, you risk not being able to qualify for credit when you need it, particularly in the first few years after declaring bankruptcy.
  • You risk losing assets not protected by exemption (consult with an expert about what’s applicable for exemption in your state).
  • You must wait 2 years to take out an FHA mortgage and 4 years for a conventional mortgage.
  • You may face issues renewing professional licensing.
  • Cosigners are not protected in a Chapter 7 filing, so creditors can still go after them and can sue for payment.

Chapter 13

  • Because of the credit score damage caused by bankruptcy, you risk not being able to qualify for credit when you need it, particularly in the first few years after declaring bankruptcy.
  • You must wait 2 years to take out an FHA mortgage and 4 years for a conventional mortgage.
  • You may face issues renewing professional licensing.

Life after debt consolidation or bankruptcy

Be prepared to make some life changes after consolidating your debts or declaring bankruptcy.

Debt consolidation

After you’ve consolidated your debt, your focus should be on paying it off. If you’ve consolidated credit card debts, try to not rack up debt again on the credit cards.

You can build your credit score by adding positive information to your credit report. Paying your bills in full and on time can help both keep your credit utilization low and establish a record of on-time payment history. Together, those factors comprise 65% of your FICO score. Your utilization is the overall percentage you use of your available revolving credit, and experts recommend keeping that figure below 30%. Your on-time payment history makes up 35% of your credit report and demonstrates you can manage your debt payments.

Making and following a budget can help prevent you from piling up more debt. It would be wise to start saving some amount of money in an emergency fund, as it may keep you from turning to high-cost debt when you encounter unexpected costs. Experts recommend you save enough to cover three to six months’ worth of fixed expenses.

Bankruptcy

Having the bankruptcy on your credit report will weigh down your credit score for a while, but the process also gives you a fresh start.

“Filing for bankruptcy can devastate a score, but that’s not the focus of the consumer’s decision at that point — discharging debt is,” said Lynch. He adds most filers have at least some credit offers soon after filing, although they may not receive the best rates.

You can rebuild your score over time by adding positive information to your credit history, like on-time payments, and using very little of your available credit. If you need an idea of where and how to start rebuilding, LendingTree has tips on rebuilding your credit after filing bankruptcy, here.

The same advice as debt consolidation stands as far as managing your cash: You should create and follow a budget, as well as establish an emergency fund so that you don’t find yourself in a similar situation a few years down the road.

How to decide which option is better

When debt consolidation makes sense over bankruptcy

Debt consolidation may be a more attractive option compared to bankruptcy if you have a reasonably good credit score and can pinpoint the root of why you got into debt in the first place. If it was a one-off incident like a job loss or medical issue that forced you to rack up debt, or you’ve recently kicked poor spending habits that got you into debt, you may be able to use a debt consolidation loan to finally get back on track.

A good credit score will help you qualify for a debt consolidation loan at a lower interest rate, making it less expensive overall for you to pay off your debts. The better your credit score, the more debt consolidation options you have.

But if you haven’t resolved the issue that got you into debt in the first place, debt consolidation can be risky.

When bankruptcy makes sense over debt consolidation

Lynch recommended speaking with a credit counselor or a bankruptcy attorney to evaluate your options if the amount of unsecured debt you’re responsible for exceeds about 20% of your income. But the decision to file bankruptcy ultimately comes down to an individual’s capacity for disciplined repayment.

“The best candidates for bankruptcy are those consumers who know what the consequences will be, know what property they may stand to lose — in the case of a Chapter 7 filer — and have done their best to determine what the 3 to 5 years of repayment would be like if they were to file Chapter 13,” said Lynch.

Consider your debts

Jeffrey Arevalo, an financial wellness expert at Greenpath Financial Wellness, recommended you consider your income, the types of debt you have and your assets in deciding if bankruptcy is right for you — and, if so, which type of bankruptcy you would need to file.

According to Arevalo, you should consider whether bankruptcy can help you with the kind of debt you’re dealing with in the first place; there are some debts, including student loans, child support, alimony and tax debts, that won’t be eligible for discharge in either a Chapter 7 or Chapter 13 filing.

Consider your assets

The assets you own may affect whether or not you opt for bankruptcy over debt consolidation, too. You may risk losing certain assets like secondary residence properties, valuable vehicles and other assets that aren’t exempt for sale under applicable state and federal law to pay off your debts if you file Chapter 7 bankruptcy. The rules vary by state, so check first to see what you’d risk losing if you file for Chapter 7.

On the other hand, a benefit of filing for Chapter 13 bankruptcy is that it gives you an opportunity to save your home from foreclosure or a car from repossession, if that’s a risk you’re facing.

Eligibility

Finally, filing would depend on whether or not you are eligible for bankruptcy.

“Based on bankruptcy guidelines in your state, if you make too much or too little of income it will determine whether or not you have the ability or inability to repay your debt,” said Arevalo.

To be eligible for Chapter 13 bankruptcy you must first:

  1. Have regular income
  2. The amount of secured debt (like a mortgage or auto loan) cannot be more than $1,184,200, and the amount of unsecured debt (like medical bills or credit card debt) cannot exceed $394,725

To be eligible for Chapter 7 bankruptcy you must prove you cannot afford your debt payments. To do so you must:

  1. Prove your monthly income is less than the median income in your state for your family size
  2. If you don’t pass the first requirement, the court will use another complex calculation to see whether your disposable income is enough to satisfy your debt obligations

Student loans

Filing for either type of bankruptcy won’t result in your student loans being discharged in most cases, according to the experts.

“Contrary to popular belief, both federal and private student loans can be discharged in bankruptcy, but the standards applied most often — the so-called ‘Brunner test’ — are difficult for many people to satisfy,” said Lynch.

To have student loans discharged, you have to file an adversary proceeding, a lawsuit filed in bankruptcy court. That’s when you have to pass what’s commonly referred to as the Brunner Test, meaning you must prove repayment would “impose undue hardship on you and your dependents.”

The following factors determine undue hardship:

  • Repaying the loan would not allow you to maintain a minimal living standard.
  • Evidence shows that the hardship will likely continue throughout much of the loan’s repayment period.
  • Good faith efforts were made towards loan payment prior to the bankruptcy filing.

The chances of any individual borrower passing the test are slim, according to John Colwell, president of the National Association of Consumer Bankruptcy Attorneys.

“You can sue and try to prove a hardship discharge in bankruptcy but the burden of proof on the debtor is very high,” Colwell said. On top of that, Colwell told MagnifyMoney, the process is an additional expense for an already cash-strapped debtor, who would have to pay a lawyer to file the lawsuit and combat an aggressive opposition from the student loan companies.

In February 2018, the U.S. Department of Education announced it would review the undue hardship definition, but, according to Lynch, “it’s even debatable whether that would have any real effect, as actual changes would have to come via Congress.”

Statute of limitations
Borrowers who have private student loans should remember private loans are generally subject to a state’s statute of limitations, Lynch added.

“If the statute has expired, there may be no need to include the loans in a bankruptcy filing,” said Lynch. He advised anyone considering bankruptcy with private loans to first speak with an experienced bankruptcy attorney who has had success with discharging student loans.

Repayment options
Student loans likely won’t be discharged in either type of bankruptcy. However, if you opt to file for Chapter 13 bankruptcy, the repayment plan may reduce your payment to something more manageable for your budget — or you may have no payment at all for three to five years as you pay down your debts.

If you have federal student loans and are struggling to make payments, it may be beneficial to contact your loan servicer and ask about forbearance, deferment or your eligibility for one of several repayment plans. Some private student loan companies offer similar options.

The bottom line

Understanding your mix of assets and and passing the eligibility test doesn’t necessarily mean bankruptcy is the best option for you over debt consolidation. And owning a house or having the credit score to qualify for a balance transfer credit card or personal loan doesn’t mean you should consolidate your debt.

If you understand the differences but are struggling to make up your mind or having trouble understanding your options, you should contact a professional. Lynch recommended speaking to multiple financial professionals, including a credit counselor or bankruptcy attorney, and weighing their recommendations before making a final decision.

Advertiser Disclosure: The card offers that appear on this site are 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 card companies or all card offers available in the marketplace.

Brittney Laryea
Brittney Laryea |

Brittney Laryea is a writer at MagnifyMoney. You can email Brittney at brittney@magnifymoney.com

TAGS:

Get A Pre-Approved Personal Loan

$

Won’t impact your credit score

Advertiser Disclosure

Pay Down My Debt

The Pros and Cons of Debt Consolidation & Methods

Editorial Note: The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Pros and Cons of Debt Consolidation
iStock

As of June 2018, Americans carry over $1 trillion in revolving debt, according to data from the Federal Reserve. And carrying debt can be troublesome if it has high interest rates. Credit cards, for example, had an average rate of 15.54% in the second quarter of 2018. That can make it hard for you to manage payments and pay down your debt sooner.

While it would be nice to wish our debt away, you may be considering the next best option: debt consolidation. It could help you save money and potentially pay down debt faster.

Like any financial strategy, debt consolidation isn’t perfect. There are pros and cons to consider anytime you restructure your debt or take out a new loan.

Pros of debt consolidation

The advantages of debt consolidation are often important enough for consumers to overlook any potential downsides. That’s because debt consolidation has the potential to save you money while getting you out of debt.

Here’s a rundown of how debt consolidation could help you save money, along with the additional advantages that come with this strategy.

1. You could repay your debt sooner

One of the biggest advantages of debt consolidation is the potential to save money and time on your debt, said financial planner Justin Pritchard of Approach Financial in Montrose, Colo. One goal of debt consolidation is to get a lower interest rate. With a lower rate, more of your payments are going toward your principal balance each month.

Imagine you have $6,000 in credit card debt at an APR of 15%. If you made a minimum payment of $120 each month, you’d pay a total of $9,473 over seven years. But if you consolidated your debt into a personal loan with an 8% APR and made the same monthly payment, you’d repay a total of $7,323 over five years instead. That’s a savings of more than $2,000 and two years of loan payments.

Pritchard notes that high interest rates make it difficult to pay down debt, whereas a lower rate can help you make a bigger dent in your balance with each monthly payment you make. If you’re able to consolidate to a lower rate and keep making the same monthly payment, you can make a lot of progress in a shorter amount of time. Use our table below to compare multiple offers in minutes to get the lowest interest rate!

LendingTree
APR

5.99%
To
35.99%

Credit Req.

Minimum 500 FICO

Minimum Credit Score

Terms

24 to 60

months

Origination Fee

Varies

LEARN MORE Secured

on LendingTree’s secure website

LendingTree is our parent company.... Read More

2. You could simplify your finances

Financial planner Neal Frankle of Credit Pilgrim said debt consolidation can simplify repayment. If you have a lot of different accounts, he said, it’s easy to get disorganized and miss a payment. This could lead to both late fees and a ding to your credit score, which wouldn’t help your situation.

By consolidating your debt into a single new loan, you can go from multiple monthly debt payments down to one. This could make it easier to stay on top of your payments and focus on your end goal, Frankle said.

3. You may be able to secure a fixed repayment schedule

Financial adviser Fred Leamnson noted that revolving debt, such as credit card debt, may be harder to pay off if you’re still using credit. If you continue spending on your credit card while you make payments, you can get stuck in a cycle where your new credit card charges outpace any progress you make.

If you consolidate debt with a personal loan, you could opt for a fixed interest rate. That would make your monthly payment and repayment period easier to manage. Plus, you couldn’t tack on more debt to your personal loan. Just be wary of accumulating new debt on your paid-off credit card.

Cons of debt consolidation

While securing a lower interest rate can help you save money on your debt, consolidating with a personal loan or another financial product does come with risks.

Some of the main disadvantages of consolidating your debts include:

1. Consolidating your debt won’t solve your financial problems on its own

Financial planner Dan Kellermeyer of New Heights Financial Planning said debt consolidation may not provide a long-term solution if you have trouble controlling your spending.

“For people who have bad spending habits, I would recommend seeking help from a budget coach or financial planner first,” he said. That way, you can get to the root of your problem and prevent a situation where you consolidate debt but continue racking up new debt.

2. Debt consolidation can cost money on its own

Depending on how you choose to consolidate your debt, you may have to pay upfront costs. For example, personal loans can come with origination fees from 1 percent to 8 percent. Home equity loans, on the other hand, come with closing costs similar to those of a traditional mortgage.

These costs or fees can offset your savings, Pritchard said. For that reason, you should factor in any fees you’ll pay to ensure debt consolidation is worth it. Also consider looking for debt consolidation options that don’t charge any fees.

Pros & Cons of each debt consolidation method

Before you consolidate debt to save money or speed up your repayment timeline, you may want to consider the different loan options available. Consider this breakdown of the popular debt consolidation methods, along with their pros and cons.

What it is

A balance transfer card is a type of credit card that offers 0% APR for a limited time. These cards may let you transfer multiple credit card balances and loans over to the new rate, helping you save money on interest and score a single monthly payment.

Pros

  • If you can pay off your debt during your card’s 0% introductory term, this option is basically an interest-free loan.

  • It’s easy to research and apply for balance transfer cards online.

  • Some balance transfer cards don’t charge any fees to transfer your balance.


Cons

  • Most balance transfer cards charge a 3% to 5% fee to transfer your balance.

  • If you continue using your credit card after you consolidate, you may have trouble paying off your debt before the promotional period ends.

  • You could temporarily impact your credit because you’re adding hard inquiries to your credit report, noted Pritchard. “If you’re in credit-building mode, that may impact your ability to get a great deal on a mortgage or car loan,” he said.

  • Your introductory APR won’t last forever. While you may get 0% for up to 20 months, your card’s rate will rise after the promotional period.

Who is it best for?

Balance transfer cards make the most sense for people with high credit scores because they can usually qualify for the promotional rates. These cards are also best for consumers who can stop using their credit cards so that they can focus on paying off their debt for good.

Where to find the best offer

Check our marketplace for balance transfer cards. Consider the length of each promotional period and fees.

What it is

A debt consolidation loan is a personal loan used to consolidate debt. Personal loans come with a fixed interest rate, monthly payment, and repayment schedule.

Pros

  • Personal loans can offer attractive interest rates that can help consumers save money in debt repayment.

  • Debt consolidation loans help you create a debt payoff plan. “These loans can help set a timeline for wiping out your debt,” Frankle said. “That structure is really helpful for some people.”

  • While a balance transfer card could leave you tempted to continue using it for purchases, this isn’t an option with a personal loan. That could mean you’re better able to stick to your financial goals.


Cons

  • While debt consolidation loans can lower your monthly payments, you may end up paying more in interest if you stretch out your repayment timeline, Kellermeyer said.

  • Consolidating debt only moves your debt, and it could make it easier to rack up more. “You don’t actually reduce the amount you owe, and consolidating can free up your credit cards and tempt you to spend more,” Pritchard said.

  • The interest rate may be higher on these loans than with some other options.

Who is it best for?

Debt consolidation loans are best for consumers who need a structured way to pay off their debt. They’re also a smart option for consumers with high credit scores since they may be able to qualify for the lowest interest rates.

Where to find the best offer

Compare lenders using our personal loan marketplace. Double-check lender fees, rates, and borrowing limits.

What it is

A home equity loan is a fixed-rate debt that uses the equity you have in your home as collateral. You’ll have a fixed monthly payment and repayment timeline.

Pros

  • Since this is a secured loan, you may qualify for a lower interest rate than you could get with other debt consolidation options.

  • You can refinance revolving debt such as credit card debt into a loan product with a fixed interest rate and fixed monthly payment.


Cons

  • You can only borrow up to 85 percent of your home’s value with a home equity loan. So this option may not be available to some homebuyers.

  • Home equity loans may come with costs such as an application or loan processing fee, an origination or underwriting fee, a lender or funding fee, an appraisal fee, document preparation and recording fees, and broker fees.

  • You could lose your home to foreclosure if you don’t repay this loan.

Who is it best for?

“A home equity loan might make sense if you have significant equity in your house, a secure income source that’s going to keep you out of foreclosure, and you really want to minimize your interest rate,” Pritchard said.

Where to find the best offer

Start your search by reviewing our guide to home equity loans. Weigh the benefits of a home equity loan compared with the idea of using your home as collateral.

What it is

A home equity line of credit (HELOC) is a line of credit that lets you borrow against the equity in your home. HELOCs typically come with variable interest rates.

Pros

  • Since HELOCs are secured by the equity in your home, they can offer attractive interest rates.

  • HELOCs don’t require you to borrow a set amount. Instead, you get the option to borrow amounts that you need up to a preset limit.


Cons

  • HELOCs can come with fees, including for applications, title searches and appraisals. But not all HELOCs charge these fees, so make sure to shop around.

  • Since you only have to repay amounts you borrow, your monthly payment can vary widely.

  • HELOCs typically come with variable interest rates, meaning your payment could go up or down throughout the life of your loan.

  • You can only borrow up to 85 percent of your home’s value, so this option is only good for those who have a lot of home equity.

Who is it best for?

HELOCs are best for consumers who have a lot of equity in their homes and want a line of credit to borrow against.

Where to find the best offer

Kick-start your search by learning more about HELOCs. Consider comparing your options for a HELOC with a balance transfer card. Review rates as you shop lenders and ensure you’re comfortable with using your home as collateral.

What it is

Debt management plans are overseen by credit counseling agencies, according to Kevin Gallegos, vice president of new client enrollment at Freedom Debt Relief. With these plans, consumers make a monthly payment that’s used to pay their creditors based on a payment plan that’s agreed upon by all parties. This type of plan may land you a lower interest rate and reduced fees.

Pros

  • Gallegos said a debt management plan could “simplify bill-paying by combining debts to obtain one interest rate and one payment.”

  • Joseph Martin, a credit counselor with Take Charge America, a national nonprofit credit counseling and debt management agency, said credit counseling agencies do a lot of the work for you with these plans. “With a debt management plan offered through a nonprofit credit counseling agency, a credit counselor works on your behalf to negotiate more favorable terms with each creditor. ... Once you make your single payment each month, they also take steps to disburse the funds for you on your behalf.

  • A debt management plan could help you secure a lower interest rate, Gallegos said. “As a result, you can more easily meet your monthly budget, or pay more than the minimum to repay your debt more quickly.”


Cons

  • Debt management plans typically charge a monthly administration fee. These fees can add up over the course of a debt management program. But these fees can be offset by the interest you save.

  • If you enroll in a debt management plan, you need to stop using your credit cards to receive the full benefit. “That can be a big challenge for some,” Gallegos said.

Who is it best for?

Gallegos said debt management plans are best for consumers with less than $7,500 in unsecured debt who can make monthly payments, and who would benefit from a slightly lower interest rate.

Where to find the best offer

Martin said you can take part in a confidential, free credit counseling session at a nonprofit agency. Consider checking in with the National Foundation for Credit Counseling.

The bottom line

Consolidating debt can be a good move if it helps you save money or repay your debt faster. But it’s important to consider all your options before you pull the trigger.

The right debt consolidation method for you can vary. Consider what kind of debt you have and how much you have of it, your current interest rates and which consolidation methods are available. By doing some research, you can wind up with the best debt consolidation product for your unique needs.

Advertiser Disclosure: The card offers that appear on this site are 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 card companies or all card offers available in the marketplace.

Holly Johnson
Holly Johnson |

Holly Johnson is a writer at MagnifyMoney. You can email Holly here

TAGS:

Get A Pre-Approved Personal Loan

$

Won’t impact your credit score

Advertiser Disclosure

Building Credit, Life Events, Pay Down My Debt

How Do Student Loans Affect Your Credit Score?

Editorial Note: The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Many college students, graduates and parents (or grandparents) of students have taken out student loans to help pay for educational expenses. These loans are generally reported to the three national consumer credit reporting agencies — Equifax, Experian and TransUnion — and could impact the borrower’s credit score.

Building credit can be important for your financial and personal life. A high score can make qualifying for new loans or credit cards easier, may save you money with lower interest rates or insurance premiums and could even help you rent an apartment or home.

Because so many people have student loans — and for many new college students, the loans may be the first time they use credit — understanding how student loans can affect your credit is important.

So, how exactly do student loans affect your credit score?

Student loans can hurt or help your credit score

As with other types of installment loans, such as a personal loan or auto loan, your student debt can help or hurt your credit score depending on how you manage your loans and your overall credit profile.

But student loans have a few features, such as deferment or forbearance, that may not be as common with other types of installment loans. Understanding these features, how they work and the impact they could have on your credit can help you manage your student loans with confidence.

If you want to see where you stand with your credit, you may be able to check your credit reports and scores for free through a variety of financial institutions and online tools. For example, LendingTree, the parent company of MagnifyMoney, gives you free access to your TransUnion VantageScore 3.0.

How student loans can hurt your credit

Opening new accounts can lower your score

Whether you take out a student loan or something else, a new credit account can lead to a dip in your credit score for several reasons.

For one thing, the new account could decrease the average age of accounts on your credit reports — a higher average age is generally better for your score. Additionally, if you applied for a private student loan, the application could lead to the lender reviewing your credit history. A record of this, known as a “hard inquiry” or “hard credit check,” remains on your report and may hurt your score a little.

Your student loans will also increase your current debt load. While the amount you owe on installment loans may not be as important as outstanding credit card debt, it could still negatively impact your score.

Credit scores aside, lenders may consider your debt-to-income ratio when you apply for a new credit account. Having a large amount of student loan debt could make it more difficult to qualify for a loan or credit line later, even if you have a good credit score.

You might wind up opening many student loan accounts

Often, students who take out student loans will have their new loan or part of the loan disbursed near the start of each term. Each disbursement could count as its own loan on your credit reports. So even if you only send one payment to your servicer every month, the servicer allocates the payments among each individual loan.

Each of these student loans could impact your age of accounts and overall debt balance. Also, if you’re repeatedly applying for private student loans, each application could lead to a hard inquiry.

You might fall behind on your payments

Your payment history is one of the most important factors in determining a credit score. Being 30 or more days past due could lead to a negative mark on your credit reports that can hurt your credit score.

And even before the 30-day point, your loan servicer may charge you a late fee if you don’t pay your bill by the due date, although some servicers give borrowers a grace period, often for 15 days.

If you’re repaying multiple student loans, missing a single payment to your loan servicer could lead to a late payment on each of your student loan accounts. Falling further behind could lead to a larger negative impact on your score, as your loan servicer reports your payments 60-, 90-, 120-, 150- and then 180-days past due.

Unless you bring your accounts current, they could be sent to collections, which could be indicated on your credit reports and hurt your score more.

Getting too far behind on student loan payments could also end up putting you in default, and you’ll immediately owe the entire outstanding balance rather than being able to use a repayment plan. The lender may also be able to sue you to take money directly from your paycheck or, in some cases, your tax return or bank account.

Federal Direct and Federal Family Education Loans go into default after 270 days of nonpayment. Other student loans may default sooner.

It can be more difficult to pay other bills

Even if you can stay on track with your student loans, having to make the monthly payment could cause trouble keeping up with other bills.

Missing a credit card, auto loan or mortgage payment could hurt your credit, as could rolling over a large amount of credit card debt, even if you’re consistently making minimum payments on time.

How student loans can help your credit

Student loans can establish credit

A student loan may be some borrowers’ first foray into the world of credit, and it could help them establish a credit history.

Credit-scoring models require a minimum amount of data to generate a score, and having a student loan on your credit reports could help make you scorable rather than “credit invisible.”

A student loan can diversify your credit mix

Showing that you can manage different types of accounts, such as installment loans and revolving accounts (credit cards, lines of credit, etc.), could help your credit score.

If the only debt you’ve had is a credit card, adding an installment loan in the form of a student loan can increase your mix of accounts and help your score. Likewise, if your only credit account is a student loan, opening a credit card might help your score.

Making on-time payments can help your score

Since your credit history is one of the most important credit-scoring factors, try to always make on-time payments as you repay your student loans. Doing so could help you build a solid credit history, which can lead to a higher score.

If you’re having trouble affording your student loan payments, consider your options (discussed below), and look for a way to lower or temporarily stop your payments before you miss one.

The loans can help build a lengthy credit history

Although it’s not one of the most important credit-scoring factors, the length of your credit history and the average age of your accounts can impact your credit score.

If you take out a student loan during your first term at school, you may wind up with years’ worth of credit history before graduating.

Continuing to take out new student loans each term could lower your average age of accounts. But your average age of accounts will still increase as you repay your loans.

One common point of confusion is whether closed accounts can still impact your credit history.

They can.

For example, if you take out a student loan as a freshman, then defer the payments for four years and repay the loan using the 10-year standard repayment plan, the account will be closed once it’s repaid.

But the account will still stay on your credit reports for up to 10 years from when it was closed, and it could impact your credit history and average age of accounts during that period.

Protecting your credit while repaying student loans

Once you take out student loans, you may be able to defer making full (or any) payments until after you leave school. But once you start repaying the loans, a misstep could lower your credit score. Here are a few ways you could keep your student loans from hurting your credit.

Don’t miss your first payment

Many student loans offer an in-school deferment period, which lets you put off loan payments until six months after you leave school. In-school deferment lets you focus on your schoolwork and makes student loans affordable, as many students might not have enough income to afford monthly payments.

But don’t forget about your loans and miss your first payment. Doing so could hurt your credit score.

To avoid missing the first — and subsequent — payments, you may want to enroll in an auto payment program with your student loan servicer. Many lenders and loan servicers will even offer you an interest rate discount as long as you’re enrolled in autopay.

Compare repayment plans

You may be able to choose from several federal student loan repayment options. The main options include the standard, extended, graduated and income-driven plans.

 

Federal student loan repayment plans
Federal student loan repayment plans

Choosing an extended, graduated or income-driven plan, rather than the standard plan, could lower your monthly payments.

If you choose an income-driven plan, be sure to renew your repayment plan every year and send your loan servicer updated documentation to remain eligible.

Although the nonstandard plans could wind up costing you more in interest overall, the lower payments could make managing all your bills easier, which can be important for maintaining and building credit.

Contact your lender if you’re struggling to afford your payments

If you do find yourself struggling to make payments, be sure to reach out to your loan servicer. With federal student loans, you may be able to switch repayment plans, or temporarily place your loans into deferment or forbearance to stop making payments.

Private student loans aren’t eligible for the federal repayment plans, but private student loan lenders may offer similar deferment or forbearance options. Some may also have other hardship options, such as temporarily reduced payment amounts or interest rates.

Your credit score won’t be affected by placing your loans into deferment, forbearance or using a hardship option, as long as you make at least the required monthly payment on time. But interest may still accrue on your loans if you’re not making payments, and the accumulated interest could be added to your loan principal once you resume your full monthly payments.

Learn about federal student loan default rehabilitation

If one or more of your federal student loans has gone into default, there are two ways that you could potentially “rehabilitate” the loan and get back on a repayment plan:

  • You could consolidation the loans with a federal Direct Consolidation Loan. The Department of Education will issue you a new loan and use the money to pay off your existing loans. If you include your defaulted loan, that loan will be paid off, and your new consolidation loan will be current. To be eligible, you must agree to either repay the consolidation loan with an income-driven repayment plan or to make three monthly payments on your defaulted loan before applying for consolidation.
  • Alternatively, you could contact your loan servicer and agree to make nine monthly payments within 10 consecutive months. The servicer will determine your monthly payment amount, which should be “reasonable and affordable” based on your discretionary income. Once you complete the payments, your loan will be taken out of default.

If you use the second method — and this if the first time you rehabilitated the student loan — the default associated with the loan will also be removed from your credit reports. Although the late payments associated with the loan will remain for up to seven years from the date of your first late payment, having the default removed could help your score.

With the first method, the default won’t be removed.

Private student loan companies may also offer you a way to rehabilitate a private student loan that’s in default. If you use the program, you may be able to request the removal of the default from your credit reports by contacting the lender, but the late payments on the account could remain.

Can shopping for student loans impact your credit?

Comparing student loan lenders and loan types won’t impact your credit score unless you submit an application for a private student loan. When you submit a private student loan application, the resulting hard inquiry could have a minor negative impact on your score.

Shopping for a private student loan, comparing the pros and cons of different lenders, and submitting multiple applications so you can accept the loan with the best terms is generally a good idea. Hard inquiries usually only have a small impact on credit scores, and scores often return to their pre-inquiry level within a few months, as long as no new negative information winds up on your credit reports.

While multiple hard inquiries can increase score drops, particularly for those who are new to credit, credit-scoring agencies recognize the importance of rate shopping. As a result, multiple inquiries for student loans that occur with a 14- to 45-day window (depending on the type of credit score) only count as a single inquiry when your score is being calculated.

Can refinancing student loans help or hurt your credit?

If you already have a good-to-excellent credit score and a low debt-to-income ratio, you may want to consider refinancing your student loans. When you refinance your loans, you take out a new credit-based private student loan and use the money to pay off some or all of your current loans. (The lender will generally send the money directly to your loan servicers.)

Refinancing can save you money if you qualify for a lower interest rate than your loans currently have, and combining multiple loans into one could make managing your debt easier.

When it comes to credit scores, refinancing student loans is a bit like taking out a new loan. You’ll need to apply for the loan, which could lead to a hard inquiry. Shopping around and submitting applications during a short period could help you get the best rate while limiting the negative impact of the inquiries.

After getting approved for refinancing, the new loan may be reported to the credit bureaus, which could lower your average age of accounts. Your other loans will be paid off, but they could stay on your credit reports for up to 10 more years. Your overall installment-loan debt will stay the same, and as long as you continue to make on-time payments, your score may improve over time.

Advertiser Disclosure: The card offers that appear on this site are 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 card companies or all card offers available in the marketplace.

Louis DeNicola
Louis DeNicola |

Louis DeNicola is a writer at MagnifyMoney. You can email Louis at louis@magnifymoney.com

TAGS: ,

Get A Pre-Approved Personal Loan

$

Won’t impact your credit score

Advertiser Disclosure

College Students and Recent Grads, Pay Down My Debt

7 Best Options to Refinance Student Loans – Get Your Lowest Rate

Editorial Note: The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Updated: September 1, 2018

Are you tired of paying a high interest rate on your student loan debt? You may be looking for ways to refinance your student loans at a lower interest rate, but don’t know where to turn. We have created the most complete list of lenders currently willing to refinance student loan debt. We recommend you start here and check rates from the top 7 national lenders offering the best student loan refinance products. All of these lenders (except Discover) also allow you to check your rate without impacting your score (using a soft credit pull), and offer the best rates of 2018:

LenderTransparency ScoreMax TermFixed APRVariable APRMax Loan Amount 
SoFiA+

20


Years

3.90% - 7.80%


Fixed Rate*

2.57% - 6.61%


Variable Rate*

No Max


Undergrad/Grad
Max Loan
Learn more Secured
EarnestA+

20


Years

3.89% - 6.32%


Fixed Rate

2.47% - 5.87%


Variable Rate

No Max


Undergrad/Grad
Max Loan
Learn more Secured
CommonBondA+

20


Years

3.20% - 7.25%


Fixed Rate

2.48% - 7.00%


Variable Rate

No Max


Undergrad/Grad
Max Loan
Learn more Secured
LendKeyA+

20


Years

3.49% - 8.72%


Fixed Rate

2.47% - 8.03%


Variable Rate

$125k / $175k


Undergrad/Grad
Max Loan
Learn more Secured
Laurel Road BankA+

20


Years

3.50% - 7.02%


Fixed Rate

2.80% - 6.22%


Variable Rate

No Max


Undergrad/Grad
Max Loan
Learn more Secured
Citizens BankA+

20


Years

3.75% - 8.69%


Fixed Rate

2.57% - 8.17%


Variable Rate

$90k / $350k


Undergraduate /
Graduate
Learn more Secured
Discover Student LoansA+

20


Years

5.24% - 8.24%


Fixed Rate

4.87% - 8.12%


Variable Rate

$150k


Undergraduate /
Graduate
Learn more Secured

You should always shop around for the best rate. Don’t worry about the impact on your credit score of applying to multiple lenders: so long as you complete all of your applications within 14 days, it will only count as one inquiry on your credit score.

We have also created:

But before you refinance, read on to see if you are ready to refinance your student loans.

Can I get approved?

Loan approval rules vary by lender. However, all of the lenders will want:

  • Proof that you can afford your payments. That means you have a job with income that is sufficient to cover your student loans and all of your other expenses.
  • Proof that you are a responsible borrower, with a demonstrated record of on-time payments. For some lenders, that means that they use the traditional FICO, requiring a good score. For other lenders, they may just have some basic rules, like no missed payments, or a certain number of on-time payments required to prove that you are responsible.
LenderMinimum credit scoreEligible degreesEligible loansAnnual income
requirements
Employment
requirement
 
SoFi

Good or Excellent
score needed

Undergraduate
& Graduate

Private, Federal,
& Parent PLUS

None

Yes


(or signed job offer)
Learn more Secured
Earnest

660

Undergraduate
& Graduate

Private, Federal,
& Parent PLUS

None

Yes


(or signed job offer)
Learn more Secured
CommonBond

660

Undergraduate
& Graduate

Private, Federal,
& Parent PLUS

None

Yes


(or signed job offer)
Learn more Secured
LendKey

680

Undergraduate
& Graduate

Private & Federal

$24K

Yes

Learn more Secured
Laurel Road Bank

Not published

Undergraduate
& Graduate

Private, Federal,
& Parent PLUS

None

Yes


(or signed job offer)
Learn more Secured
Citizens Bank

680

Undergraduate
& Graduate

Private, Federal,
& Parent PLUS

$24K

Yes

Learn more Secured
Discover Student Loans

Not published

Undergraduate
& Graduate

Private & Federal

None

Yes

Learn more Secured

Diving Deeper: The best places to consider a refinance

If you go to other sites they may claim to compare several student loan offers in one step. Just beware that they might only show you deals that pay them a referral fee, so you could miss out on lenders ready to give you better terms. Below is what we believe is the most comprehensive list of current student loan refinancing lenders.

You should take the time to shop around. FICO says there is little to no impact on your credit score for rate shopping as many providers as you’d like in a single shopping period (which can be between 14-30 days, depending upon the version of FICO). So set aside a day and apply to as many as you feel comfortable with to get a sense of who is ready to give you the best terms.

Here are more details on the 7 lenders offering the lowest interest rates:

1. SoFi

LEARN MORE Secured

on SoFi’s secure website

Read Full Review

SoFi : Variable rates from 2.57% and Fixed Rates from 3.90% (with AutoPay)*

SoFi was one of the first lenders to start offering student loan refinancing products. More MagnifyMoney readers have chosen SoFi than any other lender. The only requirement is that you graduated from a Title IV school. In order to qualify, you need to have a degree, a good job and good income.

Pros Pros

  • Borrowers can refinance private, federal and Parent PLUS loans together: Through SoFi, borrowers have the ability to combine all of their student loans (private, federal and Parent PLUS) when refinancing. Along with the ability to refinance Parent PLUS loans, parents can also transfer the PLUS loans into their child’s name.
  • Access to career coaches: SoFi offers their borrowers access to their Career Advisory Group who work one-on-one with borrowers to help plan their career paths and futures.
  • Unemployment protection: SoFi offers some help if you lose your job. During the period of unemployment they will pause your payments (for up to 12 months) and work with you to find a new job. However, just remember that any unemployment protection offered by SoFi would be weaker than the income-driven repayment options of federal loans.

Cons Cons

  • No cosigner release: While they offer you the opportunity to refinance with a cosigner, it is important to know that SoFi does not offer borrowers the opportunity to release a cosigner later on down the road.
  • You lose certain protections if you refinance a federal loan: This con is not unique to SoFi (and you will find it with all other private lenders). Federal loans come with certain protections, including robust income-driven payment protection options. You will forfeit those protections if you refinance a federal loan to a private loan.

Bottom line

Bottom line

SoFi is really the original student loan refinance company, and is now certainly the largest. SoFi has consistently offered low interest rates and has received good reviews for service. In addition, SoFi invests heavily in building a “community” – which means you can start to get other benefits once you are a SoFi member.

SoFi has taken a radical new approach when it comes to the online finance industry, not only with student loans but in the personal loan, wealth management and mortgage markets as well. With their career development programs and networking events, SoFi shows that they have a lot to offer, not only in the lending space but in other aspects of their customers lives as well.

2. Earnest

LEARN MORE Secured

on Earnest’s secure website

Read Full Review

Earnest : Variable Rates from 2.47% and Fixed Rates from 3.89% (with AutoPay)

Earnest focuses on lending to borrowers who show promise of being financially responsible borrowers. Because of this, they offer merit-based loans versus credit-based ones. 

Pros Pros

  • Flexible repayment options: Earnest offers some of the most flexible options when it comes to repayment. They allow you to choose any term length between 5-20 years. You can choose your own monthly payment, based upon what you can afford (to the penny). Earnest also offers bi-weekly payments and “skip a payment” if you run into difficulty.
  • Ability to switch between variable and fixed rates: With Earnest, you can switch between fixed and variable rates throughout the life of your loan. You can do that one time every six months until the loan is paid off. That means you can take advantage of the low variable interest rates now, and then lock in a higher fixed rate later.
  • Loans serviced in-house: Earnest is one of just a few lenders that provides in-house loan servicing versus using a third-party servicer.

Cons Cons

  • Cannot apply with a cosigner: Unlike many of the other lenders, Earnest does not allow borrowers to apply for student loan refinancing with a cosigner.
  • No option to transfer Parent PLUS loans to Child: If you are a parent that is looking to refinance your Parent PLUS loan into your child’s name, it is important to note that this cannot be done through refinancing with Earnest.
  • You lose certain protections if you refinance a federal loan: When refinancing with any private lender, you will give up certain protections if you refinance a federal loan to a private loan.

Bottom line

Bottom line

Earnest, who was recently acquired by Navient, is making a name for themselves within the student refinancing space. With their flexible repayment options and low rates, they are definitely an option worth exploring.

3. CommonBond

LEARN MORE Secured

on CommonBond’s secure website

Read Full Review

CommonBond : Variable Rates from 2.48% and Fixed Rates from 3.20% (with AutoPay)

CommonBond started out lending exclusively to graduate students. They initially targeted doctors with more than $100,000 of debt. Over time, CommonBond has expanded and now offers student loan refinancing options to graduates of almost any university (graduate and undergraduate).

Pros Pros

  • Hybrid loan option: CommonBond offers a unique “Hybrid” rate option in which rates are fixed for five years and then become variable for five years. This option can be a good choice for borrowers who intend to make extra payments and plan on paying off their student loans within the first five years. If you can a better interest rate on the Hybrid loan than the Fixed-rate option, you may end up paying less over the life of the loan.
  • Social promise: CommonBond will fund the education of someone in need in an emerging market for every loan that closes. So not only will you save money, but someone in need will get access to an education.
  • “CommonBridge” unemployment protection program: CommonBond is here to help if you lose your job. Similar to SoFi, they will pause your payments and assist you in finding a new job.

Cons Cons

  • Does not offer refinancing in the following states: Idaho, Louisiana, Mississippi, Nevada, South Dakota and Vermont.
  • You lose certain protections if you refinance a federal loan: When refinancing with any private lender, you will give up certain protections if you refinance a federal loan to a private loan.

Bottom line

Bottom line

CommonBond not only offers low rates but is also making a social impact along the way. Consider checking out everything that CommonBond has to offer in term of student loan refinancing.

4. LendKey

LEARN MORE Secured

on LendKey’s secure website

Read Full Review

LendKey : Variable Rates from 2.47% and Fixed Rates from 3.49% (with AutoPay)

LendKey works with community banks and credit unions across the country. Although you apply with LendKey, your loan will be with a community bank. Over the past year, LendKey has become increasingly competitive on pricing, and frequently has a better rate than some of the more famous marketplace lenders.

Pros Pros

  • Opportunity to work with local banks and credit unions: LendKey is a platform of community banks and credit unions, which are known for providing a more personalized customer experience and competitive interest rates.
  • Offers interest-only payment repayment: Many of the lenders on LendKey offer the option to make interest-only payments for the first four years of repayment.

Cons Cons

  • Rates can vary depending on where you live: The rate that is advertised on LendKey is the lowest possible rate among all of its lenders, and some of these lenders are only available to residents of specific areas. So even if you have an excellent credit report, there is still a possibility that you will not receive the lowest rate, depending on geographic location.
  • No Parent PLUS refinancing available: Unlike several of the other student loan refinancing companies, borrowers do not have the ability to refinance Parent PLUS loans with LendKey.
  • You lose certain protections if you refinance a federal loan: As when refinancing federal loans with any private lender, you will give up your federal protections if you refinance your federal loan to a private one.

Bottom line

Bottom line

LendKey is a good option to keep in mind if you are looking for an alternative to big bank lending. If you prefer working with a credit union or community bank, LendKey may be the route to uncovering your best offer.

5. Laurel Road Bank

LEARN MORE Secured

on Laurel Road Bank’s secure website

Read Full Review

Laurel Road Bank : Variable Rates from 2.80% and Fixed Rates from 3.50% (with AutoPay)

Laurel Road Bank offers a highly competitive product when it comes to student loan refinancing.

Pros Pros

  • Forgiveness in the case of death or disability: They may forgive the total student loan amount owed if the borrower dies before paying off their debt. In the case that the borrower suffers a permanent disability that results in a significant reduction to their income,Laurel Road Bank may forgive some, if not all of the amount owed.
  • Offers good perks for Residents and Fellows: Laurel Road Bank allows medical and dental students to pay only $100 per month throughout their residency or fellowship and up to six months after training. It is important for borrowers to keep in mind that the interest that accrues during this time will be added on to the total loan balance.

Cons Cons

  • Higher late fees: While many lenders charge late fees,Laurel Road Bank’s late fee can be slightly steeper than most at 5% or $28 (whichever is less) for a payment that is over 15 days late.
  • You lose certain protections if you refinance a federal loan: While not specific to Laurel Road Bank, it is important to keep in mind that you will give up certain protections when refinancing a federal loan with any private lender.

Bottom line

Bottom line

As a lender,Laurel Road Bank prides itself on offering personalized service while leveraging technology to make the student loan refinancing process a quick and simple one. Consider checking out their low-rate student loan refinancing product, which is offered in all 50 states.

6. Citizens Bank

LEARN MORE Secured

on Citizens Bank (RI)’s secure website

Read Full Review

Citizens Bank (RI) : Variable Rates from 2.57% and Fixed Rates from 3.75% (with AutoPay)

Citizens Bank offers student loan refinancing for both private and federal loans through its Education Refinance Loan.

Pros Pros

No degree is required to refinance: If you are a borrower who did not graduate, with Citizens Bank, you are still eligible to refinance the loans that you accumulated over the period you did attend. In order to do so, borrowers much no longer be enrolled in school.

Loyalty discount: Citizens Bank offers a 0.25% discount if you already have an account with Citizens.

Cons Cons

Cannot transfer Parent PLUS loans to Child: If you are looking to refinance your Parent PLUS loan into your child’s name, this cannot be done through Citizens Bank.

You lose certain protections if you refinance a federal loan: Any time that you refinance a federal loan to a private loan, you will give up the protections, forgiveness programs and repayment plans that come with the federal loan.

Bottom line

Bottom line

The Education Refinance Loan offered by Citizens Bank is a good one to consider, especially if you are looking to stick with a traditional banking option. Consider looking into the competitive rates that Citizens Bank has to offer.

7. Discover

LEARN MORE Secured

on Discover Student Loans’s secure website

Discover Student Loans : Variable Rates from 4.87% and Fixed Rates from 5.24% (with AutoPay)

Discover, with an array of competitive financial products, offers student loan refinancing for both private and federal loans through their private consolidation loan product.

Pros Pros

  • In-house loan servicing: When refinancing with Discover, they service their loans in-house versus using a third-party servicer.
  • Offer a variety of deferment options: Discover offers four different deferment options for borrowers. If you decide to go back to school, you may be eligible for in-school deferment as long as you are enrolled for at least half-time. In addition to in-school deferment, Discover offers deferment to borrowers on active military duty (up to 3 years), in eligible public service careers (up to 3 years) and those in a health professions residency program (up to 5 years).

Cons Cons

  • Performs a hard credit pull: While most lenders do a soft credit check, Discover does perform a hard pull on your credit.
  • No Parent PLUS refinancing available: Discover does not offer borrowers the option of refinancing their Parent PLUS loans.
  • You lose certain protections if you refinance a federal loan: Be careful when deciding to refinance your federal student loans because when doing so, you will lose access federal protections, forgiveness programs and repayment plans.

Bottom line

Bottom line

If you’re looking for a well-established bank to refinance your student loans, Discover may be the way to go. Just keep in mind that if you apply for a student loan refinance with Discover, they will do a hard pull on your credit.

 

Additional Student Loan Refinance Companies

In addition to the Top 7, there are many more lenders offering to refinance student loans. Below is a listing of all providers we have found so far. This list includes credit unions that may have limited membership. We will continue to update this list as we find more lenders:

Traditional Banks

  • First Republic Eagle Gold. The interest rates are great, but this option is not for everyone. Fixed rates range from 1.95% – 4.45% APR. You need to visit a branch and open a checking account (which has a $3,500 minimum balance to avoid fees). Branches are located in San Francisco, Palo Alto, Los Angeles, Santa Barbara, Newport Beach, San Diego, Portland (Oregon), Boston, Palm Beach (Florida), Greenwich or New York City. Loans must be $60,000 – $300,000. First Republic wants to recruit their future high net worth clients with this product.
  • Wells Fargo: As a traditional lender, Wells Fargo will look at credit score and debt burden. They offer both fixed and variable loans, with variable rates starting at 4.74% and fixed rates starting at 5.24%. You would likely get much lower interest rates from some of the new Silicon Valley lenders or the credit unions.

Credit Unions

  • Alliant Credit Union: Anyone can join this credit union. Interest rates start as low as 3.50% APR. You can borrow up to $100,000 for up to 25 years.
  • Eastman Credit Union: Credit union membership is restricted (see eligibility here). Fixed rates start at 6.50% and go up to 8% APR.
  • Navy Federal Credit Union: This credit union offers limited membership. For men and women who serve (or have served), the credit union can offer excellent rates and specialized underwriting. Variable interest rates start at 4.07% and fixed rates start at 4.70%.
  • Thrivent: Partnered with Thrivent Federal Credit Union, Thrivent Student Loan Resources offers variable rates starting at 4.13% APR and fixed rates starting at 3.99% APR. It is important to note that in order to qualify for refinancing through Thrivent, you must be a member of the Thrivent Federal Credit Union. If not already a member, borrowers can apply for membership during the student refinance application process.
  • UW Credit Union: This credit union has limited membership (you can find out who can join here, but you had better be in Wisconsin). You can borrow from $5,000 to $150,000 and rates start as low as 3.87% (variable) and 3.99% APR (fixed).

Online Lending Institutions

  • Education Loan Finance:This is a student loan refinancing option that is offered through SouthEast Bank. They have competitive rates with variable rates ranging from 2.55% – 6.01% APR and fixed rates ranging from 3.09% – 6.69% APR. Education Loan Finance also offers a “Fast Track Bonus”, so if you accept your offer within 30 days of your application date, you can earn $100 bonus cash.
  • EdVest: This company is the non-profit student loan program of the state of New Hampshire which has become available more broadly. Rates are very competitive, ranging from 4.29% – 7.89% (fixed) and 4.05% – 7.65% APR (variable).
  • IHelp : This service will find a community bank. Unfortunately, these community banks don’t have the best interest rates. Fixed rates range from 4.00% to 8.00% APR (for loans up to 15 years). If you want to get a loan from a community bank or credit union, we recommend trying LendKey instead.
  • Purefy: Purefy lenders offer variable rates ranging from 2.57%-8.17% APR and fixed interest rates ranging from 3.25% – 9.66% APR. You can borrow up to $150,000 for up to 15 years. Just answer a few questions on their site, and you can get an indication of the rate.
  • RISLA: Just like New Hampshire, the state of Rhode Island wants to help you save. You can get fixed rates starting as low as 3.49%. And you do not need to have lived or studied in Rhode Island to benefit.

Is it worth it to refinance student loans?

If you are in financial difficulty and can’t afford your monthly payments, a refinance is not the solution. Instead, you should look at options to avoid a default on student loan debt.

This is particularly important if you have Federal loans.

Don’t refinance Federal loans unless you are very comfortable with your ability to repay. Think hard about the chances you won’t be able to make payments for a few months. Once you refinance student loans, you may lose flexible Federal payment options that can help you if you genuinely can’t afford the payments you have today. Check the Federal loan repayment estimator to make sure you see all the Federal options you have right now.

If you can afford your monthly payment, but you have been a sloppy payer, then you will likely need to demonstrate responsibility before applying for a refinance.

But, if you can afford your current monthly payment and have been responsible with those payments, then a refinance could be possible and help you pay the debt off sooner.

Like any form of debt, your goal with a student loan should be to pay as low an interest rate as possible. Other than a mortgage, you will likely never have a debt as large as your student loan.

If you are able to reduce the interest rate by refinancing, then you should consider the transaction. However, make sure you include the following in any decision:

Is there an origination fee?

Many lenders have no fee, which is great news. If there is an origination fee, you need to make sure that it is worth paying. If you plan on paying off your loan very quickly, then you may not want to pay a fee. But, if you are going to be paying your loan for a long time, a fee may be worth paying.

Is the interest rate fixed or variable?

Variable interest rates will almost always be lower than fixed interest rates. But there is a reason: you end up taking all of the interest rate risk. We are currently at all-time low interest rates. So, we know that interest rates will go up, we just don’t know when.

This is a judgment call. Just remember, when rates go up, so do your payments. And, in a higher rate environment, you will not be able to refinance your student loans to a better option (because all rates will be going up).

We typically recommend fixing the rate as much as possible, unless you know that you can pay off your debt during a short time period. If you think it will take you 20 years to pay off your loan, you don’t want to bet on the next 20 years of interest rates. But, if you think you will pay it off in five years, you may want to take the bet. Some providers with variable rates will cap them, which can help temper some of the risk.

You can also compare all of these loan options in one chart with our comparison tool. It lists the rates, loan amounts, and kinds of loans each lender is willing to refinance. You can also email us with any questions at info@magnifymoney.com.

Advertiser Disclosure: The card offers that appear on this site are 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 card companies or all card offers available in the marketplace.

Nick Clements
Nick Clements |

Nick Clements is a writer at MagnifyMoney. You can email Nick at nick@magnifymoney.com

TAGS: , ,

Advertiser Disclosure

Balance Transfer, Best of, Pay Down My Debt

Best balance transfer credit cards: 0% APR, 24 months

Editorial Note: The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities prior to publication. This site may be compensated through a credit card partnership.

btgraphic

Looking for a balance transfer credit card to help pay down your debt more quickly? We’re constantly checking for new offers and have selected the best deals from our database of over 3,000 credit cards. This guide will show you the longest offers with the lowest rates, and help you manage the transfer responsibly. It will also help you understand whether you should be considering a transfer at all.

1. Best balance transfer deals

No intro fee, 0% intro APR balance transfers

Very few things in life are free. But, if you pay off your debt using a no fee, 0% APR balance transfer, you can crush your credit card debt without paying a dime to the bank. You can find a full list of no fee balance transfers here.

The Amex EveryDay® Credit Card from American Express

APPLY NOW Secured

on American Express’s secure website

Terms Apply

Rates & Fees

The Amex EveryDay® Credit Card from American Express

Annual fee
$0
Intro Purchase APR
0% for 15 Months
Intro BT APR
0% for 15 Months
Balance Transfer Fee
$0 balance transfer fee.
Regular Purchase APR
14.74%-25.74% Variable
Rewards Rate
2x points at US supermarkets, on up to $6,000 per year in purchases (then 1x), 1x points on other purchases.
Credit required
good-credit
Excellent/Good

The Amex EveryDay® Credit Card from American Express includes an extended intro period now at an intro 0% for 15 Months on balance transfers and purchases (14.74%-25.74% Variable APR after the promo period ends) and a $0 balance transfer fee. (For transfers requested within 60 days of account opening.) This offer is in direct competition with other $0 intro balance transfer fee cards like Chase Slate®.
In addition to the intro periods, you can benefit from a rewards program tailored to U.S. supermarket spenders where you earn 2x points at US supermarkets, on up to $6,000 per year in purchases (then 1x), 1x points on other purchases.
The intro offers, coupled with the rewards program make The Amex EveryDay® Credit Card from American Express the frontrunner among balance transfer cards, outpacing competitors. This card presents cardholders with the unique opportunity to transfer a balance and make a large purchase during the intro period, all while earning rewards on new purchases. To qualify for this card, you need Excellent/Good credit.
Transparency Score
Transparency Score
  • Simple Welcome Offer
  • The 2-point bonus on grocery store spending is capped
  • You need 20 transactions each month to get the 20% bonus

 

Read our full review of The Amex EveryDay® Credit Card from American Express here.

 

Chase Slate®

Chase Slate®

The information related to the Chase Slate® has been collected by MagnifyMoney and has not been reviewed or provided by the issuer of this card prior to publication.

With Chase Slate® you can save with a 0% Intro APR on Balance Transfers for 15 months and a balance transfer fee that’s Intro $0 on transfers made within 60 days of account opening. After that: Either $5 or 5%, whichever is greater.  There’s also a 0% Intro APR on Purchases for 15 months. After the intro periods end, a 16.74% - 25.49% Variable APR applies. This card also has a $0 annual fee. Plus, you can see monthly updates to your FICO® Score and the reasons behind your score for free.

You can get longer transfer periods by paying a fee (either $5 or 5% of the amount of each transfer, whichever is greater), so this deal is generally best if you have a balance you know you‘ll pay in full by the end of the promotional period.

Also, keep in mind you can’t transfer a balance from one Chase card to another, so this is good if the balance you want to move is from a bank or credit union that’s not Chase.

Transparency Score
Transparency Score
  • Interest is not deferred during the balance transfer period, which means if you do not pay off your balance by the end of the promo period, you will not be charged the interest that would have accrued during the deferral period.
  • There are late payment and cash advance fees

Tip: You have only 60 days from account opening to complete your balance transfer and get the introductory rate.

BankAmericard® Credit Card

BankAmericard® credit card

There is a 0% Introductory APR on purchases for 15 billing cycles and an introductory $0 balance transfer fee for the first 60 days your account is open. After that, the fee for future balance transfers is 3% (min. $10). There’s also an 0% Introductory APR on purchases for 15 billing cycles. After that, a 14.74% - 24.74% Variable APR will apply.
 You need Excellent/Good credit to get this card and you can only transfer debt that is not already at Bank of America. You can get longer transfer periods by paying a fee, so this deal is generally best if you have a balance you know you’ll pay in full by the end of the 15-month promotional period.
Transparency Score
Transparency Score
  • Interest is not deferred during the balance transfer period, which means if you do not pay off your balance by the end of the promo period, you will not be charged the interest that would have accrued during the deferral period.
  • No penalty APR – paying late won’t automatically raise your rate (APR)
  • There are late payment and cash advance fees

Tip: You can provide the account number for the account you want to transfer from while you apply, and if approved, the bank will handle the transfer.

APPLY NOW Secured

on Bank Of America’s secure website

 

 

0% balance transfers with a fee

If you think it will take longer than 15 months to pay off your credit card debt, these credit cards could be right for you. Don’t let the balance transfer fee scare you. It is almost always better to pay the fee than to pay a high interest rate on your existing credit card. You can calculate your savings (including the cost of the fee) at our balance transfer marketplace.

These deals listed below are the longest balance transfers we have in our database. We have listed them by number of months at 0%. Although you need good credit to be approved, don’t be discouraged if one lender rejects you. Each credit card company has their own criteria, and you might still be approved by one of the companies listed below.

Discover it® Balance Transfer

Decent 0% intro balance transfer period

Discover it® Balance Transfer: Intro APR of 0% for 18 months, 3% BT fee.

This is a basic balance transfer deal with an above average term. If you don’t have credit card balances with Discover, it’s a good option to free up your accounts with other banks. With this card, you also have the ability to earn cash back, and there is no late fee for your first missed payment and no penalty APR. Hopefully you will not need to take advantage of these features, but they are nice to have.

Transparency Score
Transparency Score
  • Interest is waived during the balance transfer period, no foreign transaction fees and no late fee for your first late payment
  • The range of the purchase interest rate based on your credit history.  The 13.74% - 24.74% Variable APR is fairly standard.
  • There is a cash advance fee

Tip: Complete your balance transfer as quickly as possible for maximum savings.

APPLY NOW Secured

on Discover Bank’s secure website

Rates & Fees

Citi® Diamond Preferred® Card– 21 Month Balance Transfer Offer

Longest 0% intro balance transfer card

Citi® Diamond Preferred® Card – 21 Month Balance Transfer Offer: 0%* for 21 months on Balance Transfers*, 5% balance transfer fee

The Citi® Diamond Preferred® Card – 21 Month Balance Transfer Offer has the longest intro period on our list at intro 0%* for 21 months on Balance Transfers* made within 4 months from account opening. There is also an intro 0%* for 12 months on Purchases*. After the intro periods end, a 14.74% - 24.74%* (Variable) APR applies. The balance transfer fee is typical at 5% of each balance transfer; $5 minimum. This provides plenty of time for you to pay off your debt. There are several other perks that make this card great: no annual fee, Citi® Private Pass®, and Citi® Concierge.

Transparency Score
TRANSPARENCY SCORE
  • Interest is not deferred during the balance transfer period, which means if you do not pay off your balance by the end of the promo period, you will not be charged the interest that would have accrued during the deferral period.
  • Interest rate is not known until you apply.

Tip: Complete your balance transfer within four months from account opening to take advantage of the 0% intro offer.

APPLY NOW Secured

on Citibank’s secure website

Low rate balance transfers

If you think it will take longer than 2 years to pay off your credit card debt, you might want to consider one of these offers. Rather than pay a balance transfer fee and receive a promotional 0% APR, these credit cards offer a low interest rate for much longer.

The longest offer can give you a low rate that only goes up if the prime rate goes up. If you can’t get that offer, there is another good option offering a low rate for three years.

Variable Rate Credit Visa®Card from UNIFY Financial CU

Long low rate balance transfer card

Unify Financial Credit Union – 6.74%-18.00% Variable APR, no expiration, $0 BT fee

If you need a long time to pay off at a reasonable rate, and have great credit, it’s hard to beat this deal from Unify Financial Credit Union, with an APR of 6.74%-18.00% Variable with no expiration. The rate is variable, but it only varies with the Prime Rate, so it won’t fluctuate much more than say a variable rate mortgage. There is also no balance transfer fee.

Just about anyone can join Unify Financial Credit Union. They’ll help you figure out what organization you can join to qualify, and you don’t need to be a member to apply.

Transparency Score
Transparency Score
  • Interest is not deferred during the balance transfer period, which means if you do not pay off your balance by the end of the promo period, you will not be charged the interest that would have accrued during the deferral period.
  • There are late payment fees.

Tip: If you’re credit’s not great, this probably isn’t for you, as the APR chosen for your account is anywhere between 6.74%-18.00% Variable.

APPLY NOW Secured

on UNIFY Financial Credit Union’s secure website

Prime Rewards Credit Card from SunTrust Bank

Long low rate balance transfer card

SunTrust Prime Rewards – 4.75% variable APR for 36 months, $0 intro BT fee

If you live in Alabama, Arkansas, Florida, Georgia, Maryland, Mississippi, North Carolina, South Carolina, Tennessee, Virginia, Washington, D.C., or West Virginia you can apply for this card without a SunTrust bank account.

The deal is you get the prime rate for 3 years with no intro balance transfer fee. That’s currently 4.75% variable, though your rate will change if the prime rate changes, either up or down, and you have 60 days to complete your transfer with no fee. After that, it’s $10 or 3% of the amount of the transfer, whichever is greater. Also beware the prime rate deal isn’t for new purchases, so only use this card for a balance transfer.

Transparency Score
Transparency Score
  • Interest is not deferred during the balance transfer period, which means if you do not pay off your balance by the end of the promo period, you will not be charged the interest that would have accrued during the deferral period.
  • The range of the purchase interest rate is based on your credit history: 12.74%-22.74% (v), and is more than 10%, which is high.
  • There are late payment and cash advance fees.

Tip: You have only 60 days from account opening to get the intro $0 transfer fee.

APPLY NOW Secured

on SunTrust Bank’s secure website

For fair credit scores

In order to be approved for the best balance transfer credit cards and offers, you generally need to have good or excellent credit. If your FICO score is above 650, you have a good chance of being approved. If your score is above 700, you have an excellent chance.

However, if your score is less than perfect, you still have options. Your best option might be a personal loan. You can learn more about personal loans for bad credit here.

There are balance transfers available for people with scores below 650. The offer below might be available to people with lower credit scores. There is a transfer fee, and it’s not as long as some of the others available with excellent credit. However, it will still be better than a standard interest rate.

Just remember: one of the biggest factors in your credit score is your amount of debt and credit utilization. If you use this offer to pay down debt aggressively, you should see your score improve over time and you will be able to qualify for even better offers.

Platinum Mastercard® from Aspire FCU

For less than perfect credit

Aspire Credit Union Platinum – 0% intro APR for 6 months, 0% intro BT fee

Balance transfer deals can be hard to come by if your credit isn’t great. But some banks are more open to it than others, and Aspire Credit Union is one of them, saying ‘fair’ or ‘good’ credit is needed for this card. Anyone can join Aspire, but if you’re looking for a longer deal you also might want to check if you’re pre-qualified for deals from other banks, without a hit to your credit score, using the list of options here.

You’ll be able to check with several banks what cards are pre-screened based on your credit profile, and you might be surprised to see some good deals you didn’t think were in your range. That way you can apply with more confidence.

Transparency Score
Transparency Score
  • Interest is not deferred during the balance transfer period, which means if you do not pay off your balance by the end of the promo period, you will not be charged the interest that would have accrued during the deferral period.
  • The ongoing interest rate isn’t known when you apply.

Tip: Only Aspire’s Platinum MasterCard has this deal. Its Platinum Rewards MasterCard doesn’t have a 0% offer. And if you transfer a balance after 6 months a 2% fee will apply.

APPLY NOW Secured

on Aspire Federal Credit Union’s secure website

2. Learn more

Checklist before you transfer

Never use a credit card at an ATM

If you use your credit card at an ATM, it will be treated as a cash advance. Most credit cards charge an upfront cash advance fee, which is typically about 5%. There is usually a much higher “cash advance” interest rate, which is typically above 20%. And there is no grace period, so interest starts to accrue right away. A cash advance is expensive, so beware.

Always pay on time.

If you do not make your payment on time, most credit cards will immediately hit you with a steep late fee. Once you are 30 days late, you will likely be reported to the credit bureau. Late payments can have a big, negative impact on your score. Once you are 60 days late, you can end up losing your low balance transfer rate and be charged a high penalty interest rate, which is usually close to 30%. Just automate your payments so you never have to worry about these fees.

Get the transfer done within 60 days

Most balance transfer offers are from the date you open your account, not the date you complete the transfer. It is in your interest to complete the balance transfer right away, so that you can benefit from the low interest rate as soon as possible. With most credit card companies, you will actually lose the promotional balance transfer offer if you do not complete the transfer within 60 or 90 days. Just get it done!

Don’t spend on the card

Your goal with a balance transfer should be to get out of debt. If you start spending on the credit card, there is a real risk that you will end up in more debt. Additionally, you could end up being charged interest on your purchase balances. If your credit card has a 0% balance transfer rate but does not have a 0% promotional rate on purchases, you would end up being charged interest on your purchases right away, until your entire balance (including the balance transfer) is paid in full. In other words, you lose the grace period on your purchases so long as you have a balance transfer in place.

Don’t try to transfer between two cards of the same bank

Credit card companies make balance transfer offers because they want to steal business from their competitors. So, it makes sense that the banks will not let you transfer balances between two credit cards offered by the same bank. If you have an airline credit card or a store credit card, just make sure you know which bank issues the card before you apply for a balance transfer.

Comparison tools

Savings calculator – which card is best?

If you’re still unsure about which cards offer you the best deal for your situation, try our calculator. You get to input the amount of debt you’re trying to get a lower rate on, your current rate, and the monthly payment you can afford. The calculator will show you which cards offer you the most savings on interest payments.

Balance transfer or a loan?

A balance transfer at 0% will get you the absolute lowest rate. But you might feel more comfortable with a single fixed monthly payment, and a single real date your loan will be paid off. A lot of new companies are offering great rates on loans you can pay off over 2, 3, 4, or 5 years. You can find the best personal loans here.

And you might find even though their rates aren’t 0%, you could afford the payment and get a plan that takes care of your debt for good at once.

Use our calculator to see how your payments and savings will compare.

Questions and Answers

It depends, some credit card companies may allow you to transfer debt from any credit card, regardless of who owns it. Though, they may require you to first add that person as an authorized user to transfer the debt. Just remember that once the debt is transferred, it becomes your legal liability. You can call the credit card company prior to applying for a card to check if you’re able to transfer debt from an account where you are not the primary account holder.

Yes, you can. Most banks will enable store card debt to be transferred. Just make sure the store card is not issued by the same bank as the balance transfer credit card.

As a general rule, if you can pay off your debt in six months or less, it usually doesn’t make sense to do a balance transfer.

Here is a simple test. (This is not 100% accurate mathematically, but it is an easy test). Divide your credit card interest rate by 12. (Imagine a credit card with a 12% interest rate. 12%/12 = 1%). In this example, you are paying about 1% interest per month. If the fee on your balance transfer is 3%, you will break even in month 3, and will be saving money thereafter. You can use that simplified math to get a good guide on whether or not you will be saving money.

And if you want the math done for you, use our tool to calculate how much each balance transfer will save you.

With all balance transfers recommended at MagnifyMoney, you would not be hit with a big, retroactive interest charge. You would be charged the purchase interest rate on the remaining balance on a go-forward basis. (Warning: not all balance transfers waive the interest. But all balance transfers recommended by MagnifyMoney do.)

Many companies offer very good deals in the first year to win new customers. These are often called “switching incentives.” For example, your mobile phone company could offer 50% off its normal rate for the first 12 months. Or your cable company could offer a big discount on the first year if you buy the bundle package. Credit card companies are no different. These companies want your debt, and are willing to give you a big discount in the first year to get you to transfer.

If you transfer your debt and use your card responsibly to pay off your balance before the intro period ends, then there is no trap associated with the 0% APR period. But, if you neglect making payments and end up with a balance post-intro period, you can easily fall into a trap of high debt — similar to the one you left when you transferred the balance. As a rule of thumb, use the intro 0% APR period to your advantage and pay off ALL your debt before it ends, otherwise you’ll start to accumulate high interest charges.

Balance transfers can be easily completed online or over the phone. After logging in to your account, you can navigate to your balance transfer and submit the request. If you rather speak to a representative, simply call the number on the back of your card. For both options, you will need to have the account number of the card with the debt and the amount you wish to transfer ready.

You will be charged a late fee by missing a payment and may put your introductory interest rate in jeopardy. Many issuers state in the terms and conditions that defaulting on your account may cause you to lose out on the promotional APR associated with the balance transfer offer. To avoid this, set up autopay for at least the minimum amount due.

No, you can’t. Balances can only be transferred between cards from different banks. That includes co-branded cards, so be sure to check which issuer your card is before applying for a balance transfer card — since you don’t want to find out after you’ve been approved that both cards are backed by the same issuer.

Many credit card issuers will allow you to transfer money to your checking account. Or, they will offer you checks that you can write to yourself or a third party. Check online, because many credit card issuers will let you transfer money directly to your bank account from your credit card. Otherwise, call your issuer and ask what deals they have available for “convenience checks.”

In most cases, you cannot. However, if you transfer a balance when you open a card, you may be able to. Some issuers state in their terms and conditions that balance transfers on new accounts will be processed at a slower rate compared with those of old accounts. You may be able to cancel your transfer during this time.

Yes, it is possible to transfer the same debt multiple times. Just remember, if there is a balance transfer fee, you could be charged that fee every time you transfer the debt. Also, don’t keep on transferring your debt without making payments because you won’t accomplish much.

You can call the bank and ask them to increase your credit limit. However, even if the bank does not increase your limit, you should still take advantage of the savings available with the limit you are given. Transferring a portion of your debt is more beneficial than transferring none.

Yes, you decide how much you want to transfer to each credit card. For example, if you have $3,000 in debt, you can transfer $2,000 to Card A and $1,000 to Card B.

No, balance transfers are excluded from earning any form of rewards whether it’s points, miles or cash back.

No, there is no penalty. You can pay off your debt whenever you want without a penalty. It’s key to pay off your balance as soon as possible and within the intro period to avoid carrying a balance post-intro period.

Mathematically, the best balance transfer credit cards are no fee, 0% intro APR offers. You literally pay nothing to transfer your balance and can save hundreds of dollars in interest had you left your balance on a high APR card. Check out our list of the best no-fee balance transfer cards here. However, those cards tend to have shorter intro periods of 15 months or less, so you may need more time to pay off your balance.

If you are running out of time on your intro APR and you still have a balance, don’t sweat it. At least two months before your existing intro period ends, start looking for a new balance transfer offer from a different issuer. Transfer any remaining balance to the card with the new 0% intro offer. This can provide you with the additional time needed to pay off your balance. Ideally, look for a card that has a 0% intro APR and also no balance transfer fee.

Advertiser Disclosure: The card offers that appear on this site are 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 card companies or all card offers available in the marketplace.

Nick Clements
Nick Clements |

Nick Clements is a writer at MagnifyMoney. You can email Nick at nick@magnifymoney.com

TAGS:

Advertiser Disclosure

Balance Transfer, Best of, Pay Down My Debt

9 Best 0% APR Credit Card Offers – September 2018

Editorial Note: The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities prior to publication. This site may be compensated through a credit card partnership.

There are a lot of 0% APR credit card deals in your mailbox and online, but most of them slap you with a 3 to 4% fee just to make a transfer, and that can seriously eat into your savings.

At MagnifyMoney we like to find deals no one else is showing, and we’ve searched hundreds of balance transfer credit card offers to find the banks and credit unions that ANYONE CAN JOIN which offer great 0% interest credit card deals AND no balance transfer fees. We’ve hand-picked them here.

If one 0% APR credit card doesn’t give you a big enough credit line you can try another bank or credit union for the rest of your debt. With several no fee options it’s not hard to avoid transfer fees even if you have a large balance to deal with.

1. The Amex EveryDay® Credit Card from American Express – Introductory 0% for 15 Months on balance transfers and purchases, $0 balance transfer fee.

The Amex EveryDay® Credit Card from American Express

APPLY NOW Secured

on American Express’s secure website

Terms Apply

Rates & Fees


This offer edges out competitors with the longest 0% intro period and standout perks. The Amex EveryDay® Credit Card from American Express has increased value with an intro 0% for 15 Months on purchases and balance transfers, then 14.74%-25.74% Variable APR and a $0 balance transfer fee. (For transfers requested within 60 days of account opening.) In addition to the great balance transfer offer, you can earn rewards — 2x points at US supermarkets, on up to $6,000 per year in purchases (then 1x), 1x points on other purchases.

Note: There are other 15-month offers from big banks offering intro $0 balance transfer fees at the end of this post, but below we’ve listed our favorite offers from credit unions and lesser known banks that provide balance transfer offers up to 12 months. However, if you need a longer intro period, you might be better off paying a standard 3% balance transfer fee for a card like the Discover it® Balance Transfer which offers an intro 0% for 18 months on balance transfers (after, 13.74% - 24.74% Variable APR).

2. Edward Jones World MasterCard® – Intro 0% for 12 billing cycles on balance transfers through 10/31/2018, NO FEE

Edward Jones World MasterCard®

APPLY NOW Secured

on Edward Jones’s secure website

You’ll need to go to an Edward Jones branch to open up an account first if you want this deal. Edward Jones is an investment advisory company, so they’ll want to have a conversation about your retirement needs. But you don’t need to have money in stocks to be a customer of Edward Jones and try to get this card. Just beware that you only have 60 days to complete your transfer to lock in the intro 0% for 12 billing cycles, and after the intro period a 14.74% Variable APR applies. This deal expires 10/31/2018.

3. Choice Rewards World MasterCard® from First Tech FCU – Intro 0% for 12 months on balance transfers, NO FEE

Choice Rewards World MasterCard® from First Tech FCU

APPLY NOW Secured

on First Technology Federal Credit Union’s secure website

Anyone can join First Tech Federal Credit Union by becoming a member of the Financial Fitness Association for $8, or the Computer History Museum for $15. You can apply for the card without joining first. The intro 0% for 12 months and no transfer fee on balances transferred within first 90 days of account opening is for the Choice Rewards World MasterCard® from First Tech FCU. After the intro period, an APR of 11.74%-18.00% variable applies. You also Earn 20,000 Rewards Points when you spend $3,000 in your first two months.

4. Rewards Visa Card from La Capitol FCU – Intro 0% for 12 months on balance transfers and purchases, NO FEE

Visa Rewards Card from La Capitol FCU

APPLY NOW Secured

on La Capitol Federal Credit Union’s secure website

Anyone can join La Capitol Federal Credit Union by becoming a member of the Louisiana Association for Personal Financial Achievement, which costs $20. Just indicate that’s how you want to be eligible when you apply for the card – no need to join before you apply. And La Capitol accepts members from all across the country, so you don’t have to live in Louisiana to take advantage of this deal on the Rewards Visa Card from La Capitol FCU. The introductory 0% for 12 months on balance transfers applies to balances transferred within first 90 days of account opening. After the intro period, a 12.00%-18.00% variable APR applies.

5. Visa® Signature Credit Card from Purdue FCU – Intro 0% for 12 months on balance transfers and purchases, NO FEE

Visa® Signature Credit Card from Purdue FCU

APPLY NOW Secured

on Purdue FCU’s secure website

The intro 0% for 12 months offer is only for their Visa® Signature Credit Card – other cards have a higher intro rate. After the intro period ends, 11.50%-17.50% Fixed APR applies. The Purdue Federal Credit Union doesn’t have open membership, but one way to be eligible for credit union membership is to join the Purdue University Alumni Association as a Friend of the University.

Anyone can join the association, but it costs $50. The good news is you can apply and get a decision before you become a member of the Alumni Association.

6. Premier America Credit Union – 0% Intro APR for 6 months on balance transfers and purchases, NO FEE

Premier Privileges Rewards Mastercard® from Premier America CU

APPLY NOW Secured

on Premier America’s secure website

Premier America is unique because it has the Student Mastercard® from Premier America CU that’s eligible for the intro 0% for 6 months on balance transfers, though credit limits on that card are $500 – $2,000. There is an 11.50% Variable APR after the intro period. There’s also a card for those with no credit history – the Premier First Rewards Privileges® from Premier America CU, with limits of $1,000 – $2,000 and a 19.00% Variable APR. If you’re looking for a bigger line, the Premier Privileges Rewards Mastercard® from Premier America CU is available with limits up to $50,000 and a 8.45% - 17.95% Variable APR.

Anyone can join Premier America by becoming a member of the Alliance for the Arts. You can select that option when you apply.

7. Visa Platinum Card from Money One FCU – as low as 0% intro APR for 6 months on balance transfers and purchases, NO FEE

Visa Platinum Card from Money One FCU

APPLY NOW Secured

on Money One Federal’s secure website

Anyone can join Money One Federal by making a $20 donation to Gifts of Easter Seals. And you can apply without being a member. You’ll see a drop down option during the application process that lets you select Gifts of Easter Seals as the way you plan to become a member of the credit union. Credit lines for the Visa Platinum Card from Money One FCU are as high as $25,000. After the as low as 0% intro apr for 6 months, there’s a 8.50% to 17.80% Variable APR.

Other 0% intro APR cards to consider

8. Andigo Credit Union – Intro 0% for 6 months on balance transfers and purchases, NO FEE

Visa Platinum Card from andigo

APPLY NOW Secured

on Andigo’s secure website

You’ll have a choice to apply for the Visa Platinum Cash Back Card from andigo, Visa Platinum Rewards Card from andigo, or Visa Platinum Card from andigo. The Visa Platinum Card from andigo has a lower ongoing APR at 11.40% - 20.40% Variable, compared to 11.99% - 20.99% Variable for the Visa Platinum Cash Back Card from andigo and 13.40% - 22.40% Variable for the Visa Platinum Rewards Card from andigo. So, if you’re not sure you’ll pay it all off in 6 months, the Visa Platinum Card from andigo is a better bet.

Anyone can join Andigo by making a donation to Connect Vets for $15, and you can submit an application for the card without being a member yet.

9. ETFCU's Platinum Rewards Credit Card – Intro 0% for 6 billing cycles on balance transfers, NO FEE

ETFCU's Platinum Rewards Credit Card

APPLY NOW Secured

on Evansville Teachers Federal Credit Union’s secure website

You don’t need to be a teacher to join this credit union. Just make a $5 donation to Mater Dei Friends & Alumni Association. The ETFCU's Platinum Rewards Credit Card has an ongoing APR of 10.00% to 17.70% Variable, so you can enjoy a decent rate even after the intro deal ends.

10. Elements Financial Platinum Visa® Credit Card – Intro 0% for 6 months on balance transfers and purchases, NO FEE

Elements Financial Platinum Visa® Credit Card

APPLY NOW Secured

on ELFCU’s secure website

To become a member and apply, you’ll just need to join TruDirection, a financial literacy organization. It costs just $5 and you can join as part of the application process. The ongoing APR is 10.74% Variable which is lower than typical cards.

11. Justice Federal Credit Union – Intro 0% for 6 months on purchases, balance transfers, and cash advances, NO FEE

Student VISA® Rewards Credit Card from Justice FCU

APPLY NOW Secured

on Justice Federal Credit Union’s secure website

If you’re not a Department of Justice, Homeland Security, or U.S. court employee (or a few others), you need to join a law enforcement organization to be a member of Justice Federal. One of the eligible associations for membership is the National Native American Law Enforcement Association. It costs $15 to join.

You can apply as a non-member online to get a decision before joining. And Justice is unique in that the Student VISA® Rewards Credit Card from Justice FCU is also eligible for the intro 0% for 6 months on purchases, balance transfers, and cash advances. So, if your credit history is limited and you’re trying to deal with a balance on your very first card, this could be an option. The APR after the intro period ends is 16.90% fixed.

12. Platinum Visa Card from Michigan State FCU – Intro 0% for 6 months on balance transfers, NO FEE

Platinum Visa Card from Michigan State FCU

APPLY NOW Secured

on Michigan State University Federal Credit Union’s secure website

There is the option to apply for the Cash Back Platinum Plus Visa Credit Card from Michigan State FCU or the Platinum Visa Card from Michigan State FCU. The Platinum Visa Card from Michigan State FCU has a lower ongoing APR at 8.90% APR - 16.90% variable, compared to the 12.90% APR - 17.90% variable APR for the Cash Back Platinum Plus Visa Credit Card from Michigan State FCU which can earn 1% cash back on all purchases. Anyone can join the Michigan State University Federal Credit Union by first becoming a member of the Michigan United Conservation Clubs. However, this comes at a high fee of $30 for one year.

Other offers from big banks

13. Chase Slate® – 0% Intro APR on Balance Transfers for 15 months and 0% Intro APR on Purchases for 15 months, $0 Introductory Balance Transfer Fee

This deal is easy to find – Chase is one of the biggest banks and makes this credit card deal well known. Save with a 0% Intro APR on Balance Transfers for 15 months and Intro $0 on transfers made within 60 days of account opening. After that: Either $5 or 5%, whichever is greater. You also get a 0% Intro APR on Purchases for 15 months on purchases and balance transfers, and $0 annual fee. After the intro period, the APR is currently 16.74% - 25.49% Variable. Plus, see monthly updates to your free FICO® Score and the reasons behind your score for free.’

The information related to the Chase Slate® has been collected by MagnifyMoney and has not been reviewed or provided by the issuer of this card prior to publication.

14. BankAmericard® credit card – 0% Introductory APR for 15 billing cycles, $0 Introductory Balance Transfer Fee

BankAmericard® Credit Card

APPLY NOW Secured

on Bank Of America’s secure website

Cardholders can benefit from an 0% Introductory APR on purchases for 15 billing cycles and an introductory $0 balance transfer fee for the first 60 days your account is open. After that, the fee for future balance transfers is 3% (min. $10). Once the intro period ends, there is a 14.74% - 24.74% Variable APR. You can benefit from a $0 annual fee and access to your free FICO® Score.

Are these the best deals for you?

If you can pay off your debt within the 0% period, then yes, a no fee 0% balance transfer credit card is your absolute best bet. And if you can’t, you can hope that other 0% deals will be around to switch again.

But if you’re unsure, you might want to consider…

  • A deal that has a longer period before the rate goes up. In that case, a balance transfer fee could be worth it to lock in a 0% rate for longer.
  • Or, a card with a rate a little above 0% that could lock you into a low rate even longer.

The good news is we can figure it out for you.

Our handy, free balance transfer tool lets you input how much debt you have, and how much of a monthly payment you can afford. It will run the numbers to show you which offers will save you the most for the longest period of time.

promo balancetransfer wide

The savings from just one balance transfer can be substantial.

Let’s say you have $5,000 in credit card debt, you’re paying 18% in interest, and can afford to pay $200 a month on it. Here’s what you can save with a 0% deal:

  • 18%: It will take 32 months to pay off, with $1,312 in interest paid.
  • 0% for 12 months: You’ll pay it off in 28 months, with just $502 in interest, saving you $810 in cash. That even assumes your rate goes back up to 18% after 12 months!

But your rate doesn’t have to go up after 12 months. If you pay everything on time and maintain good credit, there’s a great chance you’ll be able to shop around and find another bank willing to offer you 0% interest again, letting you pay it off even faster.

Before you do any balance transfer though, make sure you follow these 6 golden rules of balance transfer success:

  • Never use the card for spending. You are only ready to do a balance transfer once you’ve gotten your budget in order and are no longer spending more than you earn. This card should never be used for new purchases, as it’s possible you’ll get charged a higher rate on those purchases.
  • Have a plan for the end of the promotional period. Make sure you set a reminder on your phone calendar about a month or so before your promotional period ends so you can shop around for a low rate from another bank.
  • Don’t try to transfer debt between two cards of the same bank. It won’t work. Balance transfer deals are meant to ‘steal’ your balance from a competing bank, not lower your rate from the same bank. So if you have a Chase Freedom® with a high rate, don’t apply for another Chase card like a Chase Slate® and expect you can transfer the balance. Apply for one from another bank.
  • Get that transfer done within 60 days. Otherwise your promotional deal may expire unused.
  • Never use a card at an ATM. You should never use the card for spending, and getting cash is incredibly expensive. Just don’t do it with this or any credit card.
  • Always pay on time. If you pay more than 30 days late your credit will be hurt, your rate may go up, and you may find it harder to find good deals in the future. Only do balance transfers if you’re ready to pay at least the minimum due on time, every time.

Advertiser Disclosure: The card offers that appear on this site are 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 card companies or all card offers available in the marketplace.

Nick Clements
Nick Clements |

Nick Clements is a writer at MagnifyMoney. You can email Nick at nick@magnifymoney.com

TAGS: ,

Advertiser Disclosure

Pay Down My Debt

What is the Statute of Limitations on Debt?

Editorial Note: The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Are debt collectors hounding you over debts that fell into collections years ago? Before you throw up the white flag and prepare to make a payment, do a bit of research first. Even if you legally owe the debt, the debt collector may not be able to sue you to collect on it — that’s because debt collectors only have a limited time to file a suit against you. Once this time frame — known in “legalese” as a “statute of limitations” — expires, collectors cannot file a lawsuit against you to recoup the debt.

In fact, making a payment on a debt after the debt’s statute of limitations has run can do more harm than good, which we’ll explain this guide.

What is the statute of limitation on debt?

The statute of limitations on debt is the length of time that debt collectors have to sue you to collect old debts. Once the statute of limitations passes, debt collectors lose a bit of their power. Collectors who cannot sue you cannot win a court order for repayment. Without a court order, collectors can’t garnish your wages or place a lien against your property — they can only collect what you agree to pay.

Of course, establishing the statute of limitations on an old debt can be tricky. You might want to consult a consumer debt attorney or credit counselor who is familiar with your state’s legal codes and can help you suss it out. As a leg-up, we’ve provided a map above with all the statutes of limitations by types of debt for all states in the U.S.

You can find nonprofit credit counseling agencies through the National Foundation for Credit Counseling (NFCC) and a consumer law attorney through the National Association of Consumer Advocates (NAC).

“There are all sorts of factors involved in establishing the statute of limitations. When was your last payment? What are the records on it?” explained Ira Rheingold, executive director of NACA.

Just because a lender can’t legally sue you for a debt doesn’t mean it will stop them from trying, and you may get served with a lawsuit anyway. In that case, Rheingold advises consumers to seek legal help right away.

“If you are served with a court complaint about a debt, the worst thing you can do is ignore it,” he added. “The best thing you can do is find an attorney to help you.”

Time-barred debts: Defined

If a debt has passed the statute of limitations in your state, it is considered a time-barred debt. You legally still owe time-barred debts, and collectors can still attempt to collect the debts by calling you or mailing you letters.

However, these collection attempts don’t have any teeth because you can’t be taken to court for them. Even so, many consumers feel as if making a payment is the best way to get the debt collector off their back, or they may feel as if making a payment is the best way toward improving their credit.

Both of these assumptions, unfortunately, are wrong and could do more harm than good for your financial picture.

When old debts become ‘zombie debts’

Think carefully before you make a payment on an old debt — in some states, a small debt payment, or even an agreement to pay a time-barred debt, can reset the statute of limitations. That’s one reason why debt collectors will keep calling to collect on debt even after the statute of limitations has passed, encouraging debtors to make even a tiny payment to their account.

So much as a $1 payment on a time-barred debt can restart the clock on the statute of limitations. When a formerly time-barred debt comes back to life, it is called a Zombie debt.

“Once a debt is revived, collectors may have the right to sue you again,” said Rheingold.

If collectors contact you about old debts, don’t let them talk you into bringing a time-barred debt back to life. These are steps you should take before making any agreement with a debt collector.

What to do if a debt collector calls you about an older debt

Ask if the debt is time-barred/beyond the statute of limitations. The debt collector must answer truthfully if they know whether a debt is time-barred. However, a debt collector may not know the answer, or may decline to answer the question. If you’re not sure whether a debt is time-barred, act as if it is until you can get professional counsel. An attorney or a credit counselor can help you make the right choice about whether to repay the debt.

Do not agree to a payment plan. Even a promise to repay an old debt could reset the statute of limitations. Before agreeing to any sort of repayment plan, talk to a nonprofit credit counselor or an attorney.

Do not make a partial payment on the debt. Making a small payment towards your debt may reset the statute of limitations on debt.

Write a cease and desist letter: Consumers can write to debt collectors to ask collectors to cease all forms of communication. You can use these templates to help you write to collectors. Once you write to the collectors, you shouldn’t hear from them again.

Seek legal help if necessary: In the event that a debt collector sues you, don’t ignore the lawsuit. If you don’t show up in court, the collector will likely win a default judgement against you. If you’re sued, seek legal help from a consumer advocacy attorney. People who cannot afford legal help can seek out free legal assistance from local Legal Aid.

Learn more: Should I pay off old debts or new debts first?

Although paying off time-barred debts isn’t necessary or helpful in most cases, it can feel urgent. Calls from debt collectors may push you to prioritize old debts over new debts. But if you must decide between paying current debt accounts and paying off old debts, it makes sense to focus on current debts.

Here’s why: Unfortunately, paying off old debts, especially time-barred debts, is usually not the best use of your money. Once a debt falls into collections, the damage to your credit score is done. Over time, the negative effect of the collections account will lessen. On the other hand, paying your current debts on time and in full will help you build your credit score.

Paying off old debts probably won’t help your credit much. Once an account falls into collections, the damage to your credit is as bad as it gets. Only time and adding good information on your credit report, like on-time payments on new accounts, will help your credit score recover. Remember: old debts will fall off your report after the 7-year mark, and if the debt has passed its statute of limitations, the collections agency can no longer sue you legally.

Paying off the old debt won’t remove it from your credit report. Unpaid debts remain on your credit report for seven years after they’ve gone into collections. Even if you pay the old debt, lenders will see that the debt went into collections.

In some cases, a new lender may recommend that you pay off an old account, so you can take out a new loan. In that situation, Rheingold recommends consulting a credit counselor first — “If paying off a debt would actually help your credit score, you might want to take care of it, but I would talk with a credit counselor first.”

Even if your old debt is still collectible (meaning you can be sued for it), you’ll want to address new debts before old debts. Only start addressing old debts if you have extra cash in your budget.

Ways to handle old debts that are not yet time-barred

One method for dealing with debts in collections is to negotiate a settlement offer. Depending on the age of your debt and your financial situation, many debt collectors will settle a debt for pennies on the dollar.

When it comes to settling old debts, Rheingold warns that consumers should watch out for debt settlement companies. Debt settlement companies negotiate settlement offers for consumers that have debts in collections. After a successful settlement, the company charges you a percentage of the savings or a percentage of the original debt.

However, although debt settlement seems like a valuable service, debt settlement companies are not experts in debt law, and their actions could lead to reviving a time-barred debt. Even worse, the company’s actions may leave you owing more than you owed in the first place.

If you wish to deal with old debts, and you have the financial means to pay them off, consider consulting with a non-profit credit counselor or a debt settlement attorney before engaging with collectors.

Different types of debt, different statute of limitations

The time at which a debt becomes time-barred depends on several factors, including the type of contract governing debt. These are the five types of contracts that may govern debt.

Oral contracts. Oral contracts are spoken agreements between two parties. Simply promising to repay an old debt could create a new oral contract.

Written contracts. Most debts are loans with written contracts. The statute of limitations on written contracts will govern most debts.

Open ended accounts. In some states, open ended accounts (including credit cards or retail credit cards) are treated differently than other forms of debts with written contracts. In those states, a unique statute of limitations governs open-ended accounts.

Installment sales contracts. Some debts, such as auto loans taken out from a dealership, may be governed by the Universal Commercial Code (UCC), rather than a state’s contract law. If a debt is considered an installment sales contract rather than a written contract, the UCC’s statute of limitations governs that debt.

Promissory notes. Promissory notes are written contracts in which the person paying a debt “promises” to pay the debt; many mortgages are promissory notes. In general, the statute of limitations on promissory notes is longer than the statute of limitations on other types of contracts.

Advertiser Disclosure: The card offers that appear on this site are 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 card companies or all card offers available in the marketplace.

Hannah Rounds
Hannah Rounds |

Hannah Rounds is a writer at MagnifyMoney. You can email Hannah here

TAGS:

Get A Pre-Approved Personal Loan

$

Won’t impact your credit score

Advertiser Disclosure

Pay Down My Debt

Understanding Debt Relief Programs

Editorial Note: The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Nobody seeks out illness, job loss, divorce or any other financial catastrophe, but sometimes things happen. Many people will accumulate overwhelming debt loads as a result of such hardship. If the burden of your debt is too much for you to afford, what can you do? The worst thing to do is jump into a debt relief program without educating yourself.

In this guide, we’ll explain the risks and benefits of the most common types of debt relief programs.

Bankruptcy

Chapter 7 bankruptcy, also known as liquidation bankruptcy, offers comprehensive debt relief. In liquidation bankruptcy, a court-appointed bankruptcy trustee sells certain assets (called unprotected assets), and the proceeds are used by the trustee to repay your creditors. Following the distribution of funds, the court discharges the remaining eligible debts. That means you no longer owe the debt and collectors cannot contact you about the debt. Debts that the court won’t discharge include: income tax debt that’s less than three years old, child support or alimony payments, student loans and fees and penalties owed to the government.

Although Chapter 7 bankruptcy requires selling off your valuables, filing may not leave you penniless. Filers can keep protected assets, such as personal items and money in retirement accounts. Most states allow filers to keep a small amount of cash and some amount of equity in vehicles or homes.

Who is a good candidate for Chapter 7 bankruptcy?

Chapter 7 bankruptcy is available to anyone earning less than the median monthly income for a family of your size in your state. If you earn more than the median income, you may qualify for Chapter 7 bankruptcy through “means testing.” The means test shows whether you have enough income to cover a debt repayment plan that Chapter 13 bankruptcy requires.

Being eligible for Chapter 7 bankruptcy doesn’t mean it’s a good idea for you. Some people have too many unprotected assets to make Chapter 7 bankruptcy a reasonable option. Chapter 7 bankruptcy may force people into selling paid off cars, tools for operating their business or other important assets. In those cases, Chapter 13 bankruptcy or other types of debt relief may be a better option.

— Read our article on when to consider bankruptcy

How much will you pay for Chapter 7 bankruptcy?

The amount you’ll pay for Chapter 7 bankruptcy depends on a variety of factors, including where you live and the complexity of your case.

You can expect to pay $1,100-$1,200* in attorney’s fees when you file Chapter 7 bankruptcy, according to Lois R. Lupica’s Consumer Bankruptcy Fee Study. Filers must also pay filing and court fees, which adds several hundred dollars to the cost of bankruptcy. In general, all fees have to be paid before your attorney will file your case.

*Numbers adjusted for inflation.

How does bankruptcy affect your credit score?

Following bankruptcy, your credit score will drop, but it’s not necessarily a death sentence. Bankruptcy stays on your credit report for 10 years after filing, but your credit score can recover. You can take steps to grow your credit score immediately following Chapter 7 bankruptcy.

In some cases, bankruptcy filers choose to reaffirm debts as part of the bankruptcy agreement. That means they agree to continue paying certain loans (such as a car loan or mortgage) as agreed. Making those payments can increase your credit score over time. Making timely payments on a secured credit card can also help you rebuild your score.

Filing for bankruptcy becomes less significant as time passes and you continue to display positive financial management on your credit report.

Risks of bankruptcy

  • Lower credit score: Following bankruptcy, you can expect to see your credit score drop. The lower score may make borrowing inaccessible for several years.
  • Can’t take out a mortgage: Bankruptcy makes you ineligible to take out most mortgages. Following bankruptcy, you’ll have to wait two years to take out an FHA mortgage and four years for a conventional mortgage. — Read how to get a mortgage after bankruptcy here.
  • Loss of property: Chapter 7 bankruptcy means you may have to sell off assets, which could put you in a precarious financial situation. “In Florida, you only get a $1,000 vehicle allowance. The fact that you need a vehicle to get to and from work isn’t factored into the equation,” Shawn Yesner, a bankruptcy and debt relief attorney practicing in the Tampa Bay area, told MagnifyMoney.
  • Problems with professional licensing: Leslie Tayne, a debt management attorney practicing in the New York City and Long Island area, helps clients avoid bankruptcy through debt settlement. Many of her clients are financial professionals who could face trouble renewing their license if they filed bankruptcy. “In cases like that,” Tayne told MagnifyMoney, “the last thing you want is to file bankruptcy. Something happened that caused this person to get in over their head, but they shouldn’t lose their livelihood because of it.”

Benefits of bankruptcy

  • Automatic stay: The courts grant all bankruptcy filers an automatic stay against collections activities. This means that all collections activity against you has to stop right away.
  • Discharge most debts: People with very few assets (or only protected assets), can expect to have eligible debts discharged without paying anything except attorney’s fees and filing fees.
  • Quick resolution: On average, Chapter 7 bankruptcy resolves within 115 days. Within a few months of filing bankruptcy, you can expect to move on with your life.

Other types of bankruptcy

Aside from Chapter 7 bankruptcy, many consumers file Chapter 13 bankruptcy. Chapter 13 bankruptcy allows you to keep all of your assets, but it comes with a downside. Chapter 13 bankruptcy involves a debt payment plan that lasts three to five years. On top of that, the fees for Chapter 13 bankruptcy can be much higher than the fees for Chapter 7 bankruptcy.

6 things to do before filing for bankruptcy

  1. Talk to a lawyer for free: Before deciding to file bankruptcy, talk with a few bankruptcy attorneys. Many bankruptcy attorneys offer a free consultation to determine your eligibility and give you estimates of the fees.
  2. Explore alternatives: Bankruptcy is one option, but it’s not always the best choice. Before committing to bankruptcy, you may want to talk with a certified credit counselor about other options.
  3. Understand the costs: You’ll need to come up with $1,000 or more to pay for your bankruptcy fees.
  4. Find low-cost help: In some counties, you may be able to find free or low-cost legal help through Legal Aid.
  5. You can’t declare bankruptcy again for eight years: Bankruptcy is a form of last resort for debt relief. If you opt to declare Chapter 7 bankruptcy, you won’t be able to declare bankruptcy again for another eight years.
  6. Discharged debt is taxable: Bankruptcy may relieve you of your debts, but you will have to pay income tax on the amount of debt that is discharged. You may owe the IRS more than usual when you file taxes at the end of the year.

— Read our guide on when to file bankruptcy

Debt management plans

A debt management plan is a new payment schedule for paying off existing debts. These plans are created and administered by nonprofit credit counseling companies. Under the plan, credit counselors will consolidate your credit card debts, unsecured personal loans and bills in collections into a single, monthly payment. You’ll pay the credit counseling agency instead of paying creditors directly.

The credit counseling agency doesn’t just consolidate debt, it works to reduce your monthly payment. The agency may be able to reduce interest charges, get old fees waived and even extend the length of time you have to pay a loan. “Most of the time, people see smaller monthly payments when they go on a debt management plan,” said Robby Dunn, vice president of counseling at the nonprofit company, Consumer Credit Counseling Service of Buffalo.

What happens to credit cards?

In general, when you agree to a debt management plan, your creditors close down your lines of credit. This means that you cannot use your credit cards during the repayment plan. Dunn told MagnifyMoney that some people keep one credit card with a low balance off the debt management plan. This allows people to keep a source of credit available for emergencies.

Will a debt management plan help my credit score?

When you start a debt management plan, you’ll have to close every credit card account you have, even accounts that are in good standing. This reduces your length of credit history and results in an immediate drop in your credit score; however, most people can regain the lost points in six to twelve months.

What happens if I miss a payment?

It’s imperative that you stick to your repayment plan and don’t miss any payments. Your credit counseling agency won’t be able to pay your creditors if you don’t pay them, which doesn’t leave you with many good options. “It’s important to understand that your creditors aren’t likely to be empathetic toward you. They expect to get paid,” said Dunn.

Creditors that don’t get paid may drop out of the debt management plan and report that you’re no longer paying as agreed. The creditors may also attempt to collect your debts through other means.

Risks of debt management plans

  • Debts not reduced: Unlike other forms of debt relief, debt management plans don’t reduce the amount you owe. Instead, these plans reduce your interest charges and fees.
  • Difficulty getting new credit: Closing your current credit accounts may lead to a short-term drop in your credit score. On top of that, lenders may see that you’re repaying your debts through a credit counseling agency, which may affect their willingness to extend various types of credit.
  • Lower credit score: The goal of a debt management plan is to help you clear debt without declaring bankruptcy. Unfortunately, the plan may yield a lower credit score when you close down so many accounts.

Benefits of debt management plans

  • Lower fees: Compared with bankruptcy or debt settlement, debt management plans are a low-fee option. Traditionally, nonprofit companies charge a small setup fee (less than $100 in general) and a monthly service charge ranging from $25-$50. The CFPB recommends asking credit counseling companies about setup or monthly fees before you work with the company.
  • Avoid bankruptcy: By sticking with your debt management plan and making the agreed-upon monthly payments, you can avoid bankruptcy and pay off the full balance of your debt.
  • Reduce monthly payments: The debt management plan generally comes with lower monthly payments.

Things to know before accepting a debt management plan

  • How long the plan takes: Clearing all your debts through a debt management plan could take as long as five years. A credit counselor can walk you through the specific length of your debt payoff plan.
  • No debt forgiveness: Credit counselors don’t negotiate for loan balance reductions. Even on a debt management plan, you’ll still owe the balance of your debt and interest charges.
  • Work with a nonprofit: For-profit debt management companies generally charge higher fees than nonprofit companies. You can find certified nonprofit financial counselors from the Financial Counseling Association of America (FCAA) or the National Foundation for Credit Counseling (NFCC).
  • Credit counselors help you consider other options: Debt management plans are important tools offered by credit counselors, but they shouldn’t be the only option. “Our main goal is to educate clients on what their options are. We try to help them see the advantages and disadvantages of each option,” explained Dunn.

Debt settlement

Many people confuse nonprofit credit counseling companies with for-profit debt settlement companies. Debt settlement companies do not offer credit counseling services, and instead, work to help you pay off debts that are already in collections.

How does debt settlement work?

When you settle debt, you agree to pay a creditor a portion of the debt you owe. In exchange, the creditor won’t sue you for the remaining balance. Most of the time debt settlement companies can only help you settle the debt that’s in collections.

Debt settlement companies will negotiate with creditors on your behalf. Although these companies work for you, the amount you ultimately pay depends on the creditor, your income, how long you’ve owed the debt and the type of debt you owe.

For example, credit card lenders may be more willing to settle your debts than business lenders. Additionally, debt settlement attorneys may be able to reduce the amount you owe on private student loans, but that’s not possible with federal student loans. Yesner estimates that most credit card companies settle for an average of 30%-35% of the debt amount owed, but he’s quick to point out that the range varies widely case to case.

It’s a good idea to have a solid understanding of the debt settlement process before you start working with a debt settlement company or attorney. If you don’t have upfront cash savings — a requirement for some companies — they may want you to set up a dedicated savings account to pay fees and funds. Legally you will own the funds in this account and have complete control over the account at all times.

Other companies may be willing to work with you to negotiate new payment plans. Tayne explained that she negotiates installment plans on behalf of her clients. Through her negotiations, she aims to reduce the interest rates to 0% and reduce the principal balance to a manageable amount; however, that’s not always possible to achieve.

Debt settlement companies may also ask you to change how you’re handling your creditors. If you’re paying debts as agreed, a debt settlement company may advise you to stop paying your debts.

How are debt settlement companies paid?

The fee structure of a debt settlement attorney or company will heavily affect your overall costs. “You only want an attorney that works on contingency. They should be compensated based on how much money they save you,” Tayne said. Contingency fees (fees based on a percentage of savings) incentivize your attorney to negotiate the amount you owe as low as they can. If the fee isn’t based on a negotiated savings rate, it will be based on a percentage of your overall debt load prior to negotiations.

Debt settlement companies cannot legally charge you any money unless they have successfully negotiated at least one debt for you. You must pay your creditor before the debt settlement company can collect its fee.

How does debt settlement affect my credit score?

There’s no doubt that settling your debts will affect your credit score; however, exactly how much it affects your score is difficult to estimate. Once an account is in collections, settling the debt will not cause any further damage to your credit score. However, defaulting on an account that’s on a debt settlement plan could cause substantial harm to your credit score.

“In most cases, [your credit score] will go down, but it won’t go down permanently. In some cases, settling debts could actually raise your credit score. If you have a score in the low 600s with all your accounts in default, you might see it go up right away,” said Tayne.

Risks of debt settlement

  • Legal risks: Your creditors may sue you if you default on your debts.
  • Debt load could grow: When you default on your debts, your creditors may charge you late fees or higher interest rates. Even when working toward settling a debt, your total debt balance could still grow.
  • No guarantees: Most of the time, debt settlement companies don’t have prearranged agreements with your creditors. That means that the company cannot tell you how much you’ll ultimately owe, nor can they tell you how long the settlement process will last.
  • Amount forgiven is taxable: When you settle a debt for less than you owe, the IRS considers the forgiven amount income. That means you’ll pay state and federal income tax on the forgiven amount (in most cases).

Benefits of debt settlement

  • Reduce the amount you owe: When you settle a debt in collections, you’ll only pay a percentage of what you originally owed.
  • Avoid bankruptcy: Settling debts can keep you out of bankruptcy courts. Negative information will remain on your credit report for seven years, but your credit score may recover more quickly from debt settlement than bankruptcy.
  • No fees without successful negotiation: It is illegal for debt settlement companies to charge you a fee if they fail to change the terms of your debt. You’ll only pay if the company negotiates your debt.

What are the risks to not paying creditors?

Strategically defaulting on debt may sound reasonable, but it can expose you up to a variety of risks. When you stop paying your bills, your creditor may charge you higher fees and interest. If you can’t successfully settle the debt, you’ll owe more than you did before.

Defaulting on debt will lead to negative marks on your credit report. Negative information will stay on your credit report for seven years. Settling already-defaulted debt won’t harm your credit any further; however, defaulting on a current debt account could cause your credit score to take a big hit.

Finally, your creditors may sue you if you default on a debt. Due to legal risks, Tayne recommends working with a debt settlement attorney rather than a debt settlement company. “You need someone who understands how to handle the legal risks appropriately,” she said. “It’s not enough for a company to say ‘We have an attorney on staff.’ It’s better to know that an attorney will handle legal matters.”

Things to know before settling debt

  • How are fees determined: Debt settlement companies can collect fees using two methods; they can charge you a percentage of your total debt load, or they can charge based on a percentage of savings.
  • You won’t get any guarantees: Debt settlement companies cannot promise you how long the negotiations will take, nor can they guarantee the settlement amount. Representatives offering promises are engaging in illegal activity and you should not work with them.
  • Creditors could sue you: If you fail to make payments as agreed, a creditor could sue you. After a creditor wins a suit against you, they can collect a judgment against you, which could include garnishing your wages or putting a lien on your property.
  • Creditors may offer standard settlements: Some creditors have adopted standard policies about settling debts in collections. You may be able to settle your debts on your own.

Can I settle debt on my own?

Creditors may be more willing to work with individuals than debt settlement companies, but settling debts on your own presents its own risks.

The CFPB sets out a three-step process for negotiating settlements with your creditors. The process recommends understanding your debts, proposing a solution and negotiating a realistic agreement. During the final step, the CFPB recommends enlisting the help of an attorney or credit counselor to help you with the negotiations. “Settling a debt sounds simple; you simply call up a creditor and work out a settlement. In reality, it can be a lot of work. It can take three or four hours just to start talking with the right person,” explained Tayne.

“You’re probably smart enough to do this on your own. The real value that I bring is that I do this day in and day out. Sometimes it’s just more efficient to pay someone else,” added Yesner.

That said, if money is tight, settling debts on your own could be the right option for you. Below we explain how to work through your own debt relief program.

DIY debt relief

Making your own debt relief plan may seem overwhelming, but it is possible to find debt relief without paying for outside help. Use the following tips to be successful with your own debt relief plan.

Put a stop to creditor harassment

A DIY debt relief plan requires executing a well-thought-out plan. This isn’t easy if you’re constantly hounded by calls from debt collectors. Put a stop to creditor harassment instead of sending your money to the most threatening collector.

The CFPB provides sample letters that can help you deal with debt collectors. These letters can stipulate when and how a debt collector can contact you. While collectors can still sue you, they cannot legally contact you.

Know what you owe

Once you have the creditors at bay, the first step in resolving your debt is knowing what you owe. Specifically, you will need to know how much money you owe, who owns the debt, the interest rate on the debt, the minimum monthly payment on the debt and whether the debt is in good standing. You can find most of this information from your credit report (which you can get for free from AnnualCreditReport.com).

You can find the exact amount you owe and the interest rate on current debts from the most recent billing statements from your lenders.

Make a plan for “good standing” debt

Debts in collections may seem like the most pressing matter, but most of the time you’ll want to deal with current accounts first. Once a debt is in collections, it has already damaged your credit score. Only time (and adding good credit information to your report) will fix the damage.

Unless a creditor sues you, you’ll want to put your money toward debt that’s still in good standing before dealing with debts in collections. This guide offers step-by-step guidance on how to eliminate credit card debt as fast as possible.

It’s important to note that dealing with current debts isn’t always a matter of making minimum payments on all your loans. If you have student loans, you may want to consider opting into an income-driven repayment plan. These plans will reduce your monthly payments, so you can put more money toward high-interest credit card debts.

For credit card debts, unpaid medical bills and other related debts, you may want to consider a debt consolidation loan. Debt consolidation loans are unsecured personal loans with fixed interest rates and fixed repayment schedules. They allow you to roll all your payments into a single payment, reduce your interest rate and (in some cases) increase your credit score. Debt consolidation loans are an effective option for people who have enough income to support the monthly loan payments.

Compare multiple options in minutes with our table below.

LendingTree
APR

5.99%
To
35.99%

Credit Req.

Minimum 500 FICO

Minimum Credit Score

Terms

24 to 60

months

Origination Fee

Varies

LEARN MORE Secured

on LendingTree’s secure website

LendingTree is our parent company.... Read More

Settle debts in collections

Once you’ve paid off your debts that are in good standing (or you’re easily able to make your monthly payments), you may want to work toward paying off bills in collections. Paying off bills in collections won’t improve your credit score, but it can help you avoid lawsuits.

Before you reach out to your creditors, you’ll want to create a budget that shows you how much you can put toward debt that’s in collections each month. A certified credit counselor could help you create a budget if you need help. A credit counselor or a consumer advocacy attorney may also be able to advise you if the statute of limitations on your debt has expired. When the statute of limitations on debt expires, debt collectors can no longer sue you to collect.

If you determine that you still want to pay off your debt in collections, you can propose your payoff plan to your creditor. Do not put any money toward debts in collections unless you get a payoff agreement in writing.

Enlist help as needed

Although a DIY debt relief plan is a low-cost way to get rid of debt, you may need help. If a creditor or debt collector sues you, you’ll want to contact a consumer advocacy attorney. Don’t ignore lawsuits, or your creditor may win a judgment against you.

Additionally, credit counselors that work for nonprofit companies may be able to help you understand your best options, such as through the FCAA or NFCC.

Watch out for debt relief scams

If you choose to work through overwhelming debts on your own, you could run into some scams. The following are red flags that someone or some company might be trying to scam you:

  • Charging advance fees for debt settlement: Debt settlement companies cannot charge you any fees unless they successfully help you settle a debt. Do not work with a debt settlement company that charges upfront fees.
  • For-profit credit counseling: The vast majority of credit counseling companies are not for-profit companies. The nonprofit status allows credit counselors to consider a range of payoff options instead of pushing clients toward solutions that help the company maintain the highest profits. Generally, it’s more beneficial to work with nonprofit credit counseling companies than for-profit credit counseling companies.
  • Companies making guarantees: Do not work with any company that makes guarantees or promises about debt relief. Whether you’re trying to settle debts, declare bankruptcy or reduce your monthly payments, a company cannot promise that your creditors will work with them. The best a company can do is determine whether you’re a good candidate for their services.
  • Pushy companies: No single debt relief plan is perfect for everyone. Don’t work with companies that push one option without helping you understand why that option is best for you, while also providing you with alternatives.

What to avoid when facing overwhelming debt

  • Sending money to the loudest collection agency: A good debt payoff plan deals with current debts before dealing with debts in collections. Do not send money to the debt collectors because they harass you. Instead, use a written request that tells the collector when and how they can contact you.
  • Ignoring lawsuits: Contact a lawyer who can help you understand the best options for your situation if you receive notice of a debt collection lawsuit. Ignoring the lawsuit won’t make it go away, and could make your financial situation worse.
  • Making partial payments: If you don’t have the money to pay all your monthly bills, don’t make matters worse by sending partial payments to all your creditors. Partial payments are considered just as bad as not sending a payment at all. Instead, send full payments to as many creditors as possible to keep more debts out of collections and help you rebuild your credit score.

The bottom line: When should you consider debt relief?

If you’re struggling to make your monthly debt payments, or you’re overwhelmed by calls from collection agents, you’re a good candidate for some sort of debt relief. Seeking advice from a bankruptcy attorney or a certified credit counselor is a good place to start. When you know more about your debt relief options, you can make a plan to get back on track financially.

Even if you’re making on-time payments on most of your debts, you may still benefit from a debt relief plan. Those with debts in good standing may find relief from debt management plans, consolidating your debts or by taking advantage of promotional balance transfers.

Whether you’re struggling to make payments, or you’ve already defaulted on your debts, debt relief could be right for you. The sooner you start your research, the sooner you’ll get yourself back on the right financial foot.

Advertiser Disclosure: The card offers that appear on this site are 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 card companies or all card offers available in the marketplace.

Hannah Rounds
Hannah Rounds |

Hannah Rounds is a writer at MagnifyMoney. You can email Hannah here

TAGS:

Get A Pre-Approved Personal Loan

$

Won’t impact your credit score