Managing debt is never less than stressful, but the agita only increases at a time when interest rates have risen and are widely expected to rise further still. Next week, the Federal Reserve is expected to hike the federal funds rate, and further hikes are anticipated through the year.
With interest rates heading upward, the relative costs, pros and cons of various personal finance options can be scrambled. With debt, since it involves paying interest rather than earning it, the climb in the fed funds rate should, at least in theory, make options that have a fixed interest rate—such as loans—more desirable. After all, those promise to hold the interest rate you pay steady as rates rise for many other credit products.
Since credit card interest rates, or APRs, are among those that rise in step with the Fed’s hikes, it’s wise to consider transferring elsewhere any substantial debt you hold on a credit card; that’s especially prudent if you can’t pay it off in full quickly—within a month or two.
The best option of all is to shift the amount owed to a balance transfer credit card. In exchange for a fee of between 3% and 5% of the balance transferred, you can get a 0% APR, at least for a limited time, usually between 12 and 24 months.
The snag? Not everyone can get one of these cards, which require a credit score of 700 or higher. If your score is less stellar than that, you’ll have to resort to other options, including the loan types we cover below. Here’s a rundown, along with some advice of where and how to shop.
Better credit, better rates
To get a personal loan, and so receive a sum of money to pay down debt, or for other purposes, requires clearing two main hurdles, beginning with actually qualifying for the loan. Lenders will consider a host of factors. Your credit score is a key consideration, naturally, but they’ll also look at your income, employment information, your debts, and the assets you own, among other factors.
When it comes to the rate you’ll pay, however, your credit score is the major determinant. If your score is 720 or above with high income and little debt, you’ll qualify for the best rates, which currently run as low at 5% or so from the best lenders we’ve selected. Those who have lower scores can put up collateral on their loan or secure a cosigner to get a better rate.
Specialists in bad credit and debt consolidation
If your credit history is checkered, however, and your score is lower—between 630 and 679—you’ll face notably higher rates, up to three times the rate for those with better scores, even among our top lending choices for poor credit. If your score dips lower than that, though, you will face a smaller group of lenders who will cater to borrowers with bad credit. You can also try local credit unions and online lenders, who may offer more lenient terms and better rates than some traditional and bigger banks.
Still, don’t expect a rate you exactly like; lenders consider your low credit score evidence of your high risk of missing payments or even defaulting, and will set their lending rates accordingly. And therein lies the rub for borrowers saddled with debt they accumulated on a credit card; they may not get much of a rate break by getting a loan.
“But the advantage with an installment loan is that there is an end to your debt on the horizon as long as you maintain the payment schedule,” says Janna Herron, credit card expert at ValuePenguin. “With credit card debt, you can keep adding to the balance and rolling it over from month to month.”
Regardless of your credit score, it’s worth investigating some lenders who offer loans specifically tailored to those who want to consolidate debt. For example, online lender Freedom Plus—our top choice for a debt-consolidation loan for those with an excellent credit score—offers a discount if you use at least half of the funds you receive to pay off creditors.