Why Pay High Credit Card Interest Rates with Low Rate Alternatives Out There?

Given the current economic environment, historical spending patterns and myriad other causes, millions of Americans are faced with mounting high interest rate credit card debt each month because the rate they’re paying on existing credit card accounts is at exorbitant rates of 20%-30%.

While the most obvious alternative would be to pay down credit card debt quickly, that’s completely out of reach for many people in the near term.  As such, the question is, what’s the next best way to reduce monthly payments and eventually dig out of debt?  Are there low rate alternatives out there within reach?  There are, but many people either don’t have the knowledge, the time or the inclination to take advantage of lower rate alternatives.

0% Interest Balance Transfer Cards

A front-runner would be a 0% Interest Balance Transfer.  While this may only provide temporary relief, at least it allows one to start to dig out and pay principal for some time period rather than interest.  Some top 0% interest balance transfer cards include an up-front fee which likely pales in comparison to paying double digit fees every month.  For instance, a one-time fee of 3% is a steal considering one might be paying 25% annually for years.

Here are some top options:

Discover More Card

Introductory Balance Transfer APR: 0.0% for 6 months from the date of account opening for balance transfers made with your application, then the standard APR for purchases.

Introductory Period: 6 Months

Balance Transfer Fee: 3%

Annual Fee: None

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Slate from Chase

Introductory Balance Transfer APR: 0%

Introductory Period: 12 Months

Balance Transfer Fee: 3%

Annual Fee: None

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Visa Black Card

Introductory Balance Transfer APR: 0%

Introductory Period: 6 Months

Balance Transfer Fee: 3%

Annual Fee: $495

Lending Club

By acting as either a lender or borrower on Lending Club, you’re essentially taking out the middle man – all the bureaucratic overhead, marketing fees, writeoffs for other bad loans, profits to shareholders, etc. that account for the high interest rate you’re paying on that credit card.  If you can no longer open a new credit card account for a zero interest transfer, Lending Club would be your next best step.  Under the Prosper.com system (now somewhat defunct; Lending Club is emerging as the front-runner), I used to make loans to people at 8-12% that had previously been paying 25%-30% on their debt with conventional credit card companies.  By simply taking out a loan on Lending Club, individuals can immediately drop their monthly debt costs by hundreds of dollars for very little effort.  This reduction in expenses could be directed at paying off higher interest debt.

While some risk does exist for Lenders obviously, the risk to Borrowers is really only the contract they enter into which, to me, beats paying exorbitant fees – think about if your credit card company cut your interest rate in half – that would be nice, right?  This is a pretty good deal if you live in a state that is able to work within the confines of Lending Club. Check out this Lending Club review for more information.

What to Avoid

Payday loans are generally not a good choice under any circumstances.  While someone could conjure up a once in a lifetime scenario where it made sense to have access to immediate cash no matter what the interest rate, even over short periods of time, an annualized rate of 80% is an annualized rate of 80%.  Any time you’re borrowing at rates even higher than your credit cards, you’re doing yourself a disservice.

With tax return time coming up, don’t fall for the “rebate loan” come-on either.  The rates on some of these loans are in the triple digits and it’s simply to get your hands on money that you probably didn’t (or shouldn’t have) planned on anyway.  It’s a positive windfall each year, don’t turn it into a high interest loan.  Just wait the couple weeks for the check to arrive.  If your tax preparer is pushing this, I’d question their ethics.  They may very well be handsomely rewarded for each one of these that they sell given the fat margins.  They are simply not good for taxpayers given the rate.  Ask if they’ll do one for you at the going mortgage rate, say, 6% annualized.  See what their reaction is.

Tagged as: Low Interest Rate Credit