Consumer debt in the U.S. has skyrocketed over the last decade, especially the last few years. Fueled by a sluggish economy and historically low interest rates, this trend is seeing no signs of slowing down. In fact, experts predict consumer debt to climb significantly again in 2017. U.S. consumers are virtually swimming in debt, with not much likely to change anytime soon.
According to Nerd Wallet, the average household credit card debt in the U.S. is $16,748. As a whole, U.S. consumers owe a staggering $779 billion in credit card debt. Add in student loans, auto loans, and other consumer credit and the total household debt approaches a whopping $100,000. That doesn’t even include mortgage debt!
One of the key reasons credit card debt and other consumer debt have risen so dramatically in the last decade is that the cost of living has gone up more rapidly than the income of many consumers. In fact, household debt has grown 10% faster than income since 2002. Therefore, consumers have had to rely on credit cards and other credit options to make ends meet. While credit cards offer some convenience and a stopgap measure for emergency and unexpected expenses, the price of carrying credit card debt can be quite high. According to NerdWallet, the average amount of interest paid by consumers on their credit card debt is $1,300 per year. That’s just the interest and doesn’t include the payments. This number will most definitely rise as the economy improves and the Federal Reserve continues to raise interest rates in the future.
With consumer debt so high, many people are looking to find ways to bring down the cost of their debt, particularly credit card debt, and ultimately pay it off. Credit card debt generally carries the highest interest rate and, therefore, can be the most difficult to pay off. There are many ways to address this. One such way is utilize the equity in your home. A home equity line of credit allows you to tap into the equity in your home. This seems like an attractive way to address credit card debt to many because rates on home equity lines of credit are usually a lot lower than the interest on credit cards. However, using the equity in your home to pay off debt carries significant risks.
Root causes of the credit card debt remain unresolved
While using a home equity line of credit may seem like a smart thing to do, you must ask yourself whether it will really solve the problem in the end. Using credit cards is often a result of poor money management and overspending; or, in other words, living above your means. If this is the case, using the equity in your home will only solve your problem now and could leave you worse off in the end. Yes, your payments will be lower in the beginning; however, if you continue to spend more than you make, you may find yourself racking up even more debt on top of now larger mortgage payments. In addition, depending on how big your line of credit is, you could find yourself using it to finance even more purchases that you cannot afford, or funding emergencies when they arise. Soon, you could be looking at payments that are much more than what you started with, and reduced equity in your home. This could be disastrous for your finances and put your home, which is most likely, your largest asset, at risk.
Your circumstances have likely not changed
Once you have paid off your credit card debt with proceeds from your home equity line of credit, you will find that not much in your financial picture as changed. Your payments will definitely be lower, but likely not enough to cause a significant shift in your ability to manage your finances. If you have not increased your income or lowered other expenses, you could be at risk for incurring more credit card debt. Americans are, for the most part, poor savers. Many have virtually no savings to fall back on in the event of an emergency.
With no savings to fall back on, and the same income and other expenses, the savings gained by consolidating your debt are likely to be swallowed up pretty quickly, leaving you in a position of a cash shortfall once again. If this is the case, you will most certainly be looking to purchase things on credit once again.
Moving your credit card debt from unsecured to being secured by your home
Now, let’s review the most dangerous aspect of using a home equity loan to pay off your credit card debt. When you take out a line of credit against your home, you are putting your home up as collateral against the loan. This takes your credit card debt from unsecured, meaning you have nothing at risk, other than your credit rating, to secured by your home. The bank or other lending institution extending your home equity line of credit will place a lien against your property in the form of a mortgage recorded, just like your primary mortgage. Pay this faithfully every month and on time or you are putting yourself at risk of losing your home to foreclosure in the event your circumstances change.
If you lose your job, for example, and you are unable to make your loan payments to the bank, it will exercise all means to collect the debt, including foreclosing on your home. Losing your home to foreclosure is a catastrophic financial event. Aside from the loss of your home, the short- and long-term impacts to your credit can be devastating. Now, you can see why this is a dangerous way to approach credit card debt. Let’s look at some solutions to managing your credit card debt that carry less risk.
DIY credit card debt management
If you are responsible, disciplined, and have enough income to handle the payments, there is a way to devise a plan to pay off your credit card debt on your own. It’s not necessarily easy or fast, but possible under the right circumstances. First, close all your accounts. This way, you cannot continue to spend and accumulate debt. Second, gather all your statements and take a realistic view of your situation. Sometimes, when you are deep in credit card debt, it is easy to just ignore the realities and pay the minimums. By assembling all your statements and having a good hard look at the numbers, you will know exactly where you stand. Once you have all your numbers pertinent to your credit card debt, including balances, interest rates, and terms, you can start to implement a plan to pay it off.
Some financial experts believe the snowball method is the best way to pay off your credit card debt on your own. This method requires that you first save $1,000 to have on hand for emergencies. Once you have your emergency fund built, you start with your smallest balance and pay as much as you can monthly. Meanwhile, you continue to pay the minimum payments on all of your other credit cards. Once you pay off that credit card, you move to the next smallest balance. On that card, you pay the amount you were paying against the first smallest balance plus the minimum payment while continuing to pay the minimums on the remainder of your cards. This goes on until all of your credit cards balances are gone. As you can see, the payments to a single card snowball and get larger and larger. As time goes on, you will start to pay off each balance entirely. This method is effective; however, for some people, it is hard to have the discipline to keep up with the routine. It takes discipline, dedication, and perseverance to use this method to pay off your credit card debt.
Another do-it-yourself method of paying off your credit card debt on your own is to implement the 3-year plan. If you have enough cash flow and, again, remain disciplined and determined, this is a viable way to pay off your credit card debt on your own. With this plan, you will also need to close your accounts to keep from racking up any more credit card debt. You will also need to assemble all your statements to get the information you need to implement this plan.
On the front of each of your statements, the credit card company will have a box that shows you the payments required each month to pay off your balance in 3 years. The plan is simple. You pay the amount shown on your statement every month for 36 months until your balances are at zero. Making a few extra payments here and there will help you pay off your balances even faster.
Do-it-yourself methods can be effective ways to pay off credit card debt in a defined period. However, because they require a strong commitment, it can be hard for some people to follow through.
Utilizing a debt relief company
Debt relief agencies have helped scores of people get out from under crushing credit card debt. Ideally appropriate for people who have a significant amount of debt, companies such National Debt Relief are able to help burdened consumers by negotiating with the credit card companies to reduce the balance owed into a reasonable settlement. This service is typically not for people who are able to pay back their debt. However, even for those who think they have a handle on things, loss of a job, a medical crisis, or a divorce can sometimes send good, hard working, responsible people into a financial crisis. As bills mount up, they turn to credit cards to try to keep up. The result is often a mountain of credit card debt that they are unable to pay down comfortably.
The situation can become extremely stressful when they realize their situation and start missing payments. Soon, creditors start calling, and the situation becomes increasingly difficult. A debt relief company can stop the situation from getting worse by working directly with creditors and directing all correspondence to its representatives. Settling all your credit card debt through a debt relief company takes time and patience, but in the end, consumers will have their debt paid off entirely.
Trying to resolve your credit card debt can be difficult. The thing to remember is that you didn’t get yourself in this situation overnight so getting yourself out from under it will also take time. Since there are many options for resolving your debt, you should take the time to explore them all. Paying off credit cards with equity from your home should be a last resort since there are so many other ways to resolve your problem that carry less risk. Do your homework and due diligence; you will find the right solution.