5 min
Lowering Debt Costs When Money Is Tight
The financial strain caused by the COVID-19 pandemic has left many Americans grappling with new or growing debt. According to a recent survey, nearly half of those whose finances worsened during the pandemic took on additional debt. Although borrowing might be necessary in times of crisis, it doesn’t have to be overwhelmingly expensive. Depending on your credit score, assets, and current situation, there are various strategies to make debt more manageable and less costly.
Summary
The financial strain caused by the COVID-19 pandemic has left many Americans grappling with new or growing debt. According to a recent survey, nearly half of those whose finances worsened during the pandemic took on additional debt. Although borrowing might be necessary in times of crisis, it doesn’t have to be overwhelmingly expensive. Depending on your credit score, assets, and current situation, there are various strategies to make debt more manageable and less costly.
💳 For Good or Excellent Credit: Balance Transfers, 0% Credit Cards, and Personal Loans
Borrowers with good to excellent credit (typically 690 or higher) have several favorable options when it comes to managing debt during a financial crisis. Balance transfer credit cards offering 0% APR can help avoid interest for a year or longer, though they often come with a transfer fee. If future spending is likely, a 0% APR card on purchases can provide relief. For those needing more time, a low-interest personal loan might be more practical, especially for consolidating higher-interest debts. These tools are most effective when used strategically to avoid long-term high-interest costs.
Takeaways:
• Use 0% APR cards or personal loans to manage or consolidate debt affordably if you have strong credit.
Key Terms
• Balance Transfer: Moving debt from one credit card to another with a lower interest rate, often with a fee.
• Personal Loan: A lump-sum loan that can be used to consolidate debt or cover large expenses with fixed payments.
📉 For Fair or Poor Credit: Emergency Loans
For borrowers with limited or poor credit histories, emergency loans can offer a temporary solution. These unsecured loans often carry higher interest rates and should be used cautiously. Alternatives like borrowing from family, reaching out to nonprofits, or checking with local credit unions may offer more favorable terms. Credit unions, in particular, assess more than just your credit score and might be able to extend lower-cost loans based on your overall financial situation.
Takeaways:
• Emergency loans should be considered only when no better options are available, especially if interest rates are high.
Key Terms
• Emergency Loan: A fast-access loan typically used for urgent expenses, often with higher interest rates.
🏠 For Homeowners: HELOCs
Homeowners with at least 15% equity may qualify for a home equity line of credit (HELOC), which usually offers lower interest rates than credit cards. However, HELOCs are secured by your home, meaning you could face foreclosure if you can’t repay. To be eligible, you’ll typically need a credit score of 620 or higher and a debt-to-income ratio of 40% or less. Compare multiple lenders for the best rates, and watch out for adjustable interest rates and lifetime caps to avoid future financial strain.
Takeaways:
• HELOCs offer low interest but come with risk—only consider them if you're confident you can repay.
Key Terms
• HELOC: A revolving line of credit secured by your home’s equity, allowing for flexible borrowing and repayment.
• Lifetime Cap: The maximum interest rate that can be charged on a variable-rate loan.
🏥 For Medical Bills: 0% Plans, Medical Credit Cards, and Hardship Programs
For those facing medical debt, affordable solutions include payment plans directly from providers, 0% interest medical credit cards, and hardship programs. Payment plans allow for manageable monthly installments without extra costs. Medical cards may offer deferred interest periods, but failing to repay in full can trigger retroactive interest charges. Income-based hardship plans can also significantly reduce the amount owed and monthly payments. Always ask your provider about all available options before turning to high-interest financing.
Takeaways:
• Ask providers about payment plans or hardship options before using credit cards for medical debt.
Key Terms
• Deferred Interest: A promotional period where interest accrues but isn’t charged unless the balance isn’t paid in full by the end date.
• Hardship Plan: An income-based repayment plan that may lower your monthly payments or reduce the total amount owed.
🔄 For Multiple Debts: Debt Management Plans
Debt management plans (DMPs) can consolidate unsecured debts like credit cards into one monthly payment through a nonprofit credit counseling agency. Counselors negotiate better terms with creditors, potentially lowering your interest rates or fees. DMPs typically require you to close your credit card accounts and follow a structured repayment plan. While not ideal for everyone, they can be a lifeline for those unable to keep up with multiple monthly payments and looking for a clear path to debt freedom.
Takeaways:
• A DMP may simplify repayment and reduce interest if you're struggling with multiple unsecured debts.
Key Terms
• Debt Management Plan: A repayment program arranged by a credit counseling agency that consolidates debts into one monthly payment.
• Nonprofit Credit Counseling: Accredited agencies that offer financial advice and debt solutions without profit incentives.
🆘 For the Unemployed: Credit Unions and Crisis Relief Loans
Unemployment adds an extra layer of difficulty when seeking credit, but some options remain available. Credit unions may offer personal loans with better terms based on your past financial behavior. Additionally, organizations like Capital Good Fund provide crisis relief loans by evaluating pre-pandemic income and employment. These targeted programs are available in select states and can provide emergency assistance when traditional lenders cannot.
Takeaways:
• If unemployed, look for community-based lenders that evaluate your financial history beyond credit scores.
Key Terms
• Crisis Relief Loan: A loan designed to support individuals during times of emergency or disaster, often with unique eligibility criteria.
• Capital Good Fund: A nonprofit lender offering small-dollar loans to underserved communities based on financial need and history.
Conclusion
Debt doesn’t have to be overwhelming, even during a crisis. Whether you have excellent credit or are facing unemployment, there are strategies and tools that can help make borrowing more affordable. From balance transfers and HELOCs to emergency loans and hardship plans, understanding your options is key to keeping debt manageable. Take the time to explore solutions tailored to your financial situation—and don’t hesitate to seek professional guidance if needed.
