How to Pay Off Credit Card Debt Fast: Top 5 Solutions

The cost of credit debt watch from 0:00

In today's video, I'm going to teach you how to pay off credit card debts fast. I'm going to give you five solutions, but first I want to show you something. You already know that credit card debt is so bad. You know that credit card debt is toxic. You know it's a waste of money. But I want you to see this for yourself. I want you to see the numbers. Okay, so you can use any credit card calculator that you want; this one's coming from [a rate-comparison website]. The U.S. Census Bureau says the average household has about eight thousand dollars of credit card debts. The average interest rate right now on a credit card is close to 23 percent.

That means that in most cases, a monthly minimum payment of $240 a month. So take a look at this: if you stick with the minimum payments, it's going to take you four and a half years to pay it off, and on your eight thousand dollars of credit card debts, you'll end up paying 4,876 dollars in interest. So that is sixty percent interest. That is ridiculous. Okay, so that's what I wanted to show you. Now I want to tell you that if you're in credit card debts, I want you to know about these five available options for you,

Balance transfer option watch from 1:05

so the first one is credit card balance transfer, debt consolidation, cashing out a retirement accounts, home equity line of credits, and bankruptcy. So I'm going to tell you the pros and cons of each one of these. So let's get started with the credit card balance transfer. So what is this, and what is going on here? This is when you move your credit card debt to a new credit card. The purpose is to get a lower interest rate on your new credit card. This way, you'll pay less in interest, and with the money you save, you can pay down your credit card debt faster. So here's how this works.

When you transfer your credit card debts to a new credit card, there's typically going to be a fee. It's called a balance transfer fee. So that fee, it's usually one percent to five percent of the amount that you're transferring. The average transfer fee is 2.5 percent. Okay, so you have to pay this fee in order to do this. So should you do this? Is it worth it? Well, the answer is that it depends on the math. You have to crunch the numbers to see if you're going to come out ahead. If you transfer, let's just say, eight thousand dollars, the transfer fee, it may be two hundred dollars, right?

But you could save, you could potentially save much more than two hundred dollars in interest. But you're gonna have to keep in mind that you're gonna get these new interest rates from your new credit card, but that's going to be your introductory interest rates, and that's going to be for a limited time. It could be for six months, 12 months, etc. After the introductory rate expires, the interest rate will shoot up, so you have to read the terms. Now I want to tell you this: if you have good or excellent credits, then you might get an introductory interest rates of zero percent, and in that case, you can save a ton of money on interest.

If your credit score is fair or bad, they might offer you an interest rate of 10%, 15% or even higher. That's why you need to crunch the numbers, and you have to make sure that this makes sense for you, because even if you got offered 12%, that's probably still better than your current rates from your credit card. So it just depends on your situation. Okay, so when it comes to credit scores, what's considered excellent, good, fair, bad? 720 to 850 is considered excellent, 690 to 719 is good, 630 to 689 fair, 300 to 629 bad. Now I want you to know that there may be limitations, and here are three of them.

The first one is most credit cards will not do same-issuer transfers. So for example, let's just say that you have a Visa credit card; you can't do a balance transfer to a different Visa card. Number two, you may not be able to transfer your full amount. There may be balance transfer limits. And number three, if you have a low credit score, then they can deny you. So if you're going to do this, make sure you shop around. So these are some of the things that you should be comparing: the transfer fee, the introductory interest rates, how long that introductory rate will last, the regular interest rates, annual fees, and any perks.

So we're talking about cash back, rewards, or points. Now I want to tell you how this affects your credit score. Transferring your balance does not hurt your credit score, but when you apply for the new credit card, that does hurt your credit score. When you apply for a credit card, they do a hard inquiry, and that's going to stay on your credit report for two years. But if you pay off your credit card that faster, then that will improve your credit score. Now let's move on to

Retirement account options watch from 4:51

another option. So this one involves cashing out your retirement accounts to pay your credit card debts, and this could be your 401(k), 403(b), or an IRA. The benefit of doing this is that with the money that you cash out, you can pay off your credit card debts and you'll pay less interest, and that could be a lot of money that you save. And taking money out of your retirement plan will not hurt your credit score. If you pay off your credit card debt, your credit score will probably go up. So those are the good things, but you need to know about the consequences. So here are the drawbacks.

First, this is going to be a setback for your retirement accounts, because you're going to have less money invested for growth and compounding. Seconds, if you are not of qualified age, then the money that you take out will be considered an early withdrawal, and you may be subject to penalty. So there are certain exceptions, but generally you will be subject to [a] 10% early withdrawal penalty. So third, in most cases with the 401(k) or 403(b), you will be subject to tax. So I want to show you a common example of how the penalty and tax math out. So let's just say that you take out ten thousand dollars from your 401(k), and let's just say that this is an early withdrawal.

This means that you're going to pay the IRS a one thousand dollar penalty. You'll have ten thousand dollars of taxable income. If you're in the 22% tax bracket, that's two thousand two hundred dollars lost to the IRS in tax. So you withdraw ten thousand dollars, but you end up with six thousand eight hundred after penalty and taxes. Another option is to take out a loan from your retirement plan. A common example would be a 401(k) loan. Some plans allow this; some plans don't. So you're essentially borrowing money from your own retirement plan. So in this scenario, it's like any other loan: you'll have to repay the loan and pay interest as well. However, the interest paid, that goes to your retirement accounts, so that's a plus. Now I want to walk you through another option, and it's called a debt

Debt consolidation loans watch from 7:07

consolidation loan. A debt consolidation loan is a personal loan. They call it debt consolidation because you may have debts on multiple credit cards, so you're essentially going to consolidate multiple debts into one personal loan. So with debt consolidation loans, you're going to pay back the principal and interest in equal installment payments, so you can think of it like a mortgage payments or an auto loan payments. So there are some exceptions, but that's generally how it works. So you can receive a debt consolidation loan from a bank or credit union or an online lender. So the goal is to get an interest rate that is lower than your credit cards.

So make sure that, well, first of all, you know what your credit card's interest rate is. Now, the question is, what are typical interest rates on debt consolidation loans? The answer is that it depends on your credit score. So if you have excellent credits, so we're talking 720 to 850, you can expect it to be in the range of 11%, good credit 15%, fair credit 22 percent, bad credit 25 percent. So I understand that these interest rates are high; however, they could still be better than the interest rates on your credit card. Now I want to share with you the pros and cons of debt consolidation loans, and we're going to start with the pros.

So the first one is that you may receive a lower interest rates compared to your credit card. Two, with your savings, you can pay down your debts faster. Three, if you pay down your debt, then this is going to improve your credit score. And number four, it's going to be more convenient for you, because you're just going to have one monthly payments instead of paying multiple creditors. Now let me tell you about the cons. The first one is when you apply for debt consolidation, they're most likely going to do a hard inquiry, and this is going to temporarily lower your credit score. Number two, you may not qualify if your credit score is not good enough.

And three, they may offer you a comparable or worse interest rate compared to your credit card. And I want to give you some final tips regarding debt consolidation. So the first one is to get the best possible terms for yourself. Watch out for any loan origination fees. Sometimes it'll be zero; sometimes it could be one percent or higher. There's just going to be a wide range for debt consolidation loans. Avoid prepayments penalty fees, so you want to make sure that you don't get penalized for paying off your loan early. So make sure that they don't ask for collateral. So generally they won't; sometimes they do, but avoid any offers that require collateral.

My tip number two is to shop around for the lowest interest rates. And my tip number three is to inquire with your existing financial institution. Many banks are more likely to approve their existing customers, and many credit unions will require you to be a member of theirs. However, with that being said, you should still shop around online. Another option

Home equity line of credit watch from 10:16

to pay off your credit card debts is with the home equity line of credit, so this is also referred to as a HELOC. A HELOC is a revolving line of credit that's secured by your home, so you're basically using your home as collateral. So essentially, it's like taking out a mortgage or a second mortgage on your home, and with that money, you pay off your credit card debts. There are pros and cons to doing this. So here's the good thing: if you're using your home as collateral, then this is going to be less risky for your lender. Therefore, a lender will typically give you an interest rate that is lower than your credit cards.

However, the bad thing is that, well, this is risky for you, because if you default on your HELOC payments, then your home will be at risk. If you can't make the payments, then you're going to be facing foreclosure, and you could lose your home. If you'd like to look further into home equity line of credit, then you can apply for a HELOC at a bank, a credit union, or online, but to qualify, you have to have equity in your home. Now let's talk about

Bankruptcy as a last resort watch from 11:20

option number five: filing for bankruptcy. So this legal process, it can wipe out some or all of your debts and give you a fresh start, but I want you to know what's true and what's false. So you should only use bankruptcy if you really need to. A common example would be if there's no hope of you paying back your debts, you can't get any new loans, you've defaulted, that debt collectors are calling you, they're suing you, they're garnishing your wages, then you should consider bankruptcy, but as a last resort. I want you to know that there are several types of bankruptcy, but we're going to cover Chapter 7 and Chapter 13.

In this situation, your goal of filing bankruptcy is to wipe out your credit card debts along with any other personal liabilities that you might have. If you file Chapter 7 bankruptcy, the success rates of eliminating your credit card debts is around 95%. However, you need to qualify. If you want to file for Chapter 7 bankruptcy, then you need to meet the standards, and that's going to depend on your income and the value of your assets. So the income test compares your income to the median income in your state, and it's going to take into consideration your family size. If you make too much money or you have too much in assets, then you're not going to qualify for Chapter 7 bankruptcy.

In that case, you're going to have to go at Chapter 13, and Chapter 13 bankruptcy, that is a debt repayment plan. So let me tell you the differences between Chapter 7 and Chapter 13. I'm going to give you the pros and cons. Good news with bankruptcy is that it will stop the harassments. It's going to stop the legal actions of debt collectors and creditors. You're legally going to be protected with a provision called automatic stay, and bankruptcy will wipe out some or all of your debts. So those are the good things, but you need to know the bad things, and that's going to depend on whether you're going with Chapter 7 or Chapter 13 bankruptcy.

If you qualify for Chapter 7 bankruptcy, you may have to sell some of your assets to pay your creditors. The bankruptcy court will decide which assets that you need to sell. The court will appoint a trustee who's going to oversee your liquidation process. So certain assets will be protected by federal or state exemptions, but that's going to depend on where you live. If you have no assets, then you're not gonna have to sell anything. Chapter 7 bankruptcy is going to stay on your credit report for up to 10 years. Now, the bad news with Chapter 13 bankruptcy is that you're going to have to continue paying your debts.

Some of your debts will probably be discharged, but it's not going to wipe out everything like Chapter 7 does. So Chapter 13 bankruptcy is going to be a payment plan of generally three to five years. Chapter 13 bankruptcy, it's going to stay on your credit report for seven years. So the downside of bankruptcy are: your credit score will suffer, you could lose your assets, bankruptcies are publicly reported, they can be expensive, it could end up costing a few thousand dollars, and it could be a long process. Chapter 7 usually lasts for a few months; Chapter 13 depends on your payment plan, but that could be many years.

In today's video, I shared with you five solutions. I know that these are not the only options out there, but these are very common ones where a lot of people use successfully. So I hope that some of these will help some people. I hope you do your own research. I hope this pushes you in the right direction to get more information. So thank you so much for all the support. Please subscribe, and I wish [you] a very nice day. Take care.