Dealing with high credit card debt

The average American household has $7,122 of credit card debt and the average indebt household has $15,266.  Those are pretty disturbingly high numbers. So it’s no surprice if you belong to the 1 in 4 households that are struggling to pay off their debt.

I’ve had times in the past when I carried a balance on my card for few months or paid it off when I got my paycheck just to use it again. That’s a pretty vicious cycle that’s hard to get out of. In my case I the interest rate was very low compared to the high interest rates most credit cards in the US have. A credit card interest rate can be easily 20% to 25% APR unless you have a good credit score and even then it’s over 10% APR. With that kind of interest if you are just paying off the minimum you are mostly just paying interest.

So what do you do if you’ve gotten into that kind of jam. Do you take a payday loan or car title loan to pay off your credit card? Hell no. Those are even more expensive loans. A payday loan can be up to 1600% APR. That’s what I call loan sharking except no ones probably going to come beat you up for not paying but still. Auto title loans aren’t any better. They charge any where between 60% to 160% APR. Your best bet is to consolidate your high interest loans and debt with a low or at least much lower interest personal loan. If your credit score has already taken a hit from hight credit utilization and balance then paying them off and replaceing them with a single personal loan will help in the long run. You’ll also pay less interest and can pay off your debt faster.

If you are in bad shape financially then it might be difficult to get a loan with decent interest from a bank but there’s some alternatives. I’ve recently discovered peer-to-peer lending which I think is really awesome. In p2p lending you are not getting the money from a traditional bank but rather from other people that act as investors. The loan is applied from a middle man company take takes it’s cut from the interest paid to the investors and they do preliminary screening and classification of your loan application but in the end it’s the investors that decide who gets funded. Your loan is then issued by the company with the funds gathered from multiple investors.

The two companies that do this in US are Prosper and Lending Club. Prosper is older and provides 1, 3 and 5 year loans. Lending Club is a bit newer but has surpassed Prosper in the amount of loans they issue. Lending Club only provides 3 and 5 year loans. With both companies there’s only one time origination fee which is taken from top of your loan and neither one has early payment fees so even if you take a longer term loan to get smaller monthly installment you can still pay it off at any time.

I think both are great alternatives to a regular bank and the application process seems simple enough. I haven’t tried either as a borrower but I am an investor in Lending Club. For me it provides a good return for my investment and at the same time I can help some people get back on track with their finances. As a added bonus the greedy banks don’t get their cut and hopefully at some point it provides some real competition for banks. If you are interested in becoming a investor in Lending Club follow this referral link and you get a $100 bonus with inital funding of $2500.