Credit card debt is one of the most costly forms of debt, with interest rates between 20% and 30% in some cases. (Cardholders who have missed a payment might even incur higher penalty rates.) In contrast, secured loans such as car loans and home mortgages can have far lower rates. And unlike a home mortgage or student loans, interest on credit card debt is never tax deductible.
So as with any costly loan, your first priority should be paying it off as soon as possible. And even if you have to take out another loan to do so, you can save money when you are able to transfer your debt to a new account that has a lower interest rate than your existing credit card balances.
See also: The Fastest Way to Pay Off 10K
Here are five ways that you can pay off your high interest credit card debt.
1. Credit Card Balance Transfer
If you have a balance on a high interest credit card, you can save money by transferring it to a card with a lower interest rate. Better yet, some cards offer 0% APR promotional financing on balance transfers for a limited time, from six to as long as 21 months. Most cards will impose a balance transfer fee of 3% to 5% of the amount transferred. However, there are cards available that offer balance transfers with no fee. These balance transfer offers are your best way to eliminate interest charges while you pay down your debt.
2. Personal Loan
Many banks and credit unions are willing to offer personal loans to applicants with good or excellent credit. So long as the interest rate offered is lower than your credit card balance, you can use these loans to pay off your credit cards and reduce your interest costs. However, the best rates will only be available to those who have excellent credit. If you have poor credit and a lot of debt, you may not be approved for a loan with a lower interest rate than the one you currently have.
3. 401K Loan
It’s possible to loan yourself money from your 401K so that you can pay off your high interest credit card balances. When you withdraw money from your 401K account, you can pay yourself back over as long as five years using very competitive interest rates that will be lower than nearly all credit cards. And since you are essentially acting as your own lender, there is no need to have excellent credit. On the other hand, you will be missing out on the compound interest your investments would have earned, and you will face tax penalties if you fail to pay the back the loan on time.
4. Life Insurance Loan
There are some types of whole, universal, or variable universal life insurance policies that allow you to take out a loan against them. Any money you withdraw is then deducted from your death benefit. And while interest rates can be below that of high interest credit cards, any unpaid interest will be added to your loan amount and subject to compounding. Just like a 401K loan, you are borrowing from your own funds, so your current credit rating will be irrelevant.
5. Home Equity Line of Credit
If you have equity in your home, you may be able to borrow money against it for any purpose, including paying off your high interest credit cards. Current interest rates for home equity lines of credit are below 5%, which is far better than any standard credit card’s interest rate. Your ability to secure a home equity line of credit will depend on your home’s debt to credit ratio as well as your current credit history.
Have you ever borrowed at a lower rate to pay off high interest debt?