Ideas from Your Michigan Bank
The freedom to make the purchases you want, when you want them, is a great feeling. It’s when debt gets unwieldy and challenging to repay that it can feel like a boulder on your back. Carrying debt contributes to physical and mental stress, and if making monthly payments uses most of your income, the weight of debt slows the achievement of your financial goals.
Americans collectively carry more than $800 billion in credit card debt. Breaking that staggering number down to the individual level means most adults are trying to manage about $5,300 of credit card debt every year. When evaluating the cost to borrow money, credit cards top the leader board as one of the more expensive options, charging consumers an average of 14.65% in interest. If you're juggling multiple credit accounts, payments often go toward managing interest instead of paying down the balance. And when a significant portion of your cash flow goes to fees, you may rely on credit more often to cover living expenses, raising your debt.
Fortunately, you have multiple approaches to debt consolidation that can reduce the weight on your shoulders, many of which are available from banks in Michigan. Our team outlined 3 ideas to consider and explains the pros and cons of each tactic.
- Credit card balance transfers
Some credit cards have 0% interest introductory offers to encourage you to transfer your balances to their company. The benefits of this approach include the following:
- When you move one or more balances to a single card, you can focus on paying down the total amount without the hassle and cost of paying fees and interest on multiple cards.
- By law, the promotional interest rate must remain in place for 6 months unless you miss a payment, although some banks in Michigan may offer 0% for up to 1 year or more.
The drawbacks of a credit card balance transfer for debt consolidation are:
- Fees apply to balance transfers and are usually around 3-5% of the amount you transfer.
- A limited time to pay down your debt before the interest rate increases.
- A return to a potentially high-interest rate after the promotion ends.
- Opening a new credit card can affect your credit score, a metric that Michigan banks and other financial institutions use to evaluate your financial health.
- An unsecured personal loan for debt consolidation
Consolidating credit card debt into a single, unsecured loan from a bank in Grand Rapids, Detroit, or Ann Arbor offers several advantages:
- You’ll manage a single payment instead of multiple ones.
- Debt consolidation loans often have lower interest rates than credit cards.
- Reducing credit card debt has a positive effect on your credit score.
The potential pitfalls of debt consolidation loans include the following:
- Debt consolidation loans that offer lower monthly payments may extend the amount of time you’ll need to repay your debt.
- Some debt consolidation loans have higher interest rates than others, so shop around and check the terms before signing the loan documents.
- A home equity loan or HELOC (home equity line of credit)
Homeowners can borrow against their property's equity to get either a fixed sum of money through a home equity loan or have access to funds through a HELOC. Both can provide you with funds to pay down credit card debt.
The advantages of home-based financing include:
- Home equity loans and HELOCs typically have lower interest rates than credit cards.
- Interest may be tax-deductible (check with your tax advisor to learn about eligibility).
You face several risks when relying on a home equity loan or HELOC for debt consolidation:
- You’ll face closing costs on home equity loans which are second mortgages on your property.
- Since your home is collateral for the loan, you may face foreclosure if you fall behind on payments.
- With home-based loans tied to the property's value, you may owe more than the house is worth if the value drops.
Keep in mind, after you have consolidated your debt, it may be tempting to return to paying with credit once your credit card balances return to zero. Developing and maintaining a budget is essential to controlling your debt.
If you're researching other ways to consolidate debt, you may find recommendations that include borrowing from your 401K or your life insurance policy. While those approaches may give you access to funds, banks in Michigan will strive to find a solution that protects your retirement and your beneficiaries.
Contact the Level One Bank team or visit one of our local branches to explore the right debt consolidation approach. We're here to help get the boulder of debt off your back.
“A little progress each day adds up to big results" - Satya Nani, motivational speaker, and entrepreneur