Several methods exist to pay down credit card debt. The best method for your situation depends on your creditworthiness, budget and outstanding debt amount.
Debt consolidation allows you to transfer multiple outstanding debts into a single payment.
A home equity agreement (HEA) can put your untapped home equity to productive use.
This guide discusses alternatives to pay off credit card debt, including how to use a home equity agreement (HEA) to do so.
Credit card debt has continued to grow as the country emerges from the worst of the pandemic. Coupled with inflation and the rapidly increasing cost of living, many households struggle to make minimum payments and purchasing necessities.
Various government agencies, financial institutions and credit research agencies provide information on credit card debt.
Credit card debt in 2022
During the first year of the pandemic, a surprising trend reversal occurred: credit card debt fell for the first time in seven years. Total credit card debt held by American households reached a record high of $829 billion in 2019, and the record has been broken again: it's at $841 billion so far this year!
What was the cause? It was likely a combination of federal and state government stimulus aid, the effects of social distancing, and the closure (at least for a time) of restaurants, movie theaters, bars and other places of business. Interestingly, credit card debt decreased across all generations.
Spending habits in 2021 showed that this decline in credit utilization was temporary. By the year’s close, credit card debt grew by the largest amount since 2007, reaching a total of $860 billion. In the third quarter of 2021 alone, credit card debt increased by $52 billion, the largest quarterly increase in the Federal Reserve’s 22-year history of conducting this study.
This may be because the emerging post-COVID economy has proved to be a different animal than pre-pandemic. For example, the increased cost of living has outpaced household incomes for the first time in almost a decade. The increased credit spending may reflect the increased cost of living, a result of inflation and the continued supply chain crisis.
It’s clear that households with significant credit card debt are struggling to find the discretionary income to make larger credit card payments and pay off their debt. Data also shows that:
35% of Americans have indicated that their financial situation has worsened over the past year.
30% attribute this worsening financial outlook to increased household costs.
20% of households used credit cards to pay for necessities and emergencies.
Several strategies for tackling credit card debt exist. The right method for you likely depends on the amount of debt you owe, the interest rate(s) applicable to that debt, your personal credit situation (i.e., your credit score, creditworthiness and financial abilities), and other factors that may be unique to your situation.
Snowball Method: This is best for those who are helped by an early “win” to stay motivated. It involves making minimum payments on all debts, then applying whatever else you can to the debt with the lowest balance off. When that is paid off, move to the one with the next-lowest balance. Continue until all debt is paid off.
Avalanche Method: This method involves making minimum payments on all debts, then applying whatever else you can to your highest-interest card. When that debt is paid off, apply the same strategy to the debt with the next-highest interest rate. Continue until all debt is paid off.
Balance Transfer Card: If you have a good credit score, you may be able to obtain a balance-transfer card with a low (or zero) introductory promotional rate. You could then transfer your outstanding balance(s) to this new credit card. But you must pay it off in full before the promotional rate ends.
Debt Consolidation: If your credit score is strong enough, you could obtain a personal loan at a good interest rate, then use the proceeds to pay off your debts with higher interest rates. Then you would have just one payment – the personal loan payment – at that lower interest rate.
Another way to obtain funds to pay off credit card debt, for those who own their own homes and have built equity in their home, is with a home equity agreement.
Here’s how it works: You own your home. If you have been paying your monthly mortgage for some time, chances are good that you have established equity in your home. Equity is the difference between the amount outstanding on your home versus what you have already paid in.
For example, imagine your original mortgage was for $100,000. At this point, you’ve paid it down to $70,000. Therefore, you have $30,000 of equity in your home.
A HEA puts that equity to use. In exchange for a percentage of your home’s equity, a HEA provider gives you a lump sum cash payment. You then get to use that cash in any way you see fit, including to pay off your credit card debt. Since a HEA is not a loan, there’s no monthly payment, no interest and no additional debt. Paying off your credit card debt with a HEA can improve your credit profile and credit scores.
With a HEA, you can utilize your home’s untapped equity to eliminate credit card debt. As a HEA provider, Unlock offers a way to put an unused financial resource – your home equity – to productive use.
If you have questions or think an Unlock HEA would be right for you, learn more today.