3 Alternatives to Taking on Credit Card Debt

Credit card use is on the rise, with 2024 bringing a record 1.4 trillion dollars in debt in the United States. The average interest rate for these cards is 22.76%. At that rate and making minimum payments, it would take you 56 months (five years) to eliminate that credit card debt, and you’d pay nearly $600 in interest.
It’s a losing situation for everyone but credit card companies, which is why so many people are delinquent on their credit card bills today.
Yet, it can be the easiest ‘loan’ possible when you need money fast. With so many credit card companies ready to offer their services to us, filling out the paperwork to take out a loan or saving up the money to pay cash for something is too cumbersome.
But what if you want to pay off your credit card debt or need money for something fast? Here, we’ll share three alternatives to taking on debt from a credit card company.
1. Home Equity Line of Credit
If you’ve been paying on your mortgage long enough to build equity, you could qualify for a home equity line of credit (HELOC). It’s a primary or secondary mortgage that isn’t exactly a ‘loan’ because you’re borrowing against your home’s equity.
With a HELOC, you’re given access to funds based on how much your home is worth, often up to 85% of the equity. Unlike a loan, you only use what you need and pay interest on the balance used monthly. This type of financial assistance works well for those requiring large amounts of cash to build wealth, like renovating homes or buying office equipment.
A home equity line of credit is usually open for ten years while it is interest-bearing only. Then, you have 20 years to pay back your principal. The downside of a HELOC is that the requirements are strict: you may need a 620 or higher credit score, 15% equity or more in your home, and a low (under 40%) debt-to-income ratio.
2. Borrow on Your Whole Life Policy
Do you have a whole life insurance policy you’ve paid for years? If so, you may have accrued cash value that you can borrow against.
While a traditional life insurance policy is designed to give a sum of money to your beneficiaries after you pass, many of these products also work as an investment option. In those policies, you can take out a ‘life insurance loan,’ which takes the cash value of your life insurance as collateral.
You can borrow against the accumulated funds, untaxed. However, this isn’t the best idea for everyone. Let’s look at the pros and cons of borrowing on your whole life policy.
Should You Use Your Life Insurance Cash Value?
Some advantages of using your whole life insurance policy’s cash value include skipping loan applications, repaying the debt at your own pace, and avoiding a hit to your credit score. These policy loans aren’t reported to credit bureaus.
You can also choose to withdraw the cash value and not repay it. Instead, the money is deducted from the death benefit when it is paid out.
On the other hand, all the cash value you’ve built up is gaining interest, and if you take it out as a loan, it could take years to build back up. Your family loses that money if you don’t repay it while alive.
Before you use this option, consider the downsides, such as your income tax liability and protection from creditors. For more information on whole life insurance policies, check out this article by OJM Group.
3. Personal or Secured Loan
Taking out loans is usually the last thing you’re trying to do, but it may be a better option than using credit cards.
Personal loans through traditional avenues like the bank or peer-to-peer lending sites are time-consuming and require proof of income, high credit scores, and other hurdles to jump. But if you meet the requirements, you may be able to take out a loan with a lower interest rate and easier repayment terms than a credit card provides.
Secured loans use collateral to back up the loan, so the requirements are usually more lenient. Look at the interest rates and payoff penalties, compare the loans offered to you, and choose the one with the best terms.
Conclusion
Whether you need money to expand your home or office or an unexpected expense, credit cards are not the best option. Instead of pulling out your treasured AmEx or MasterCard, talk to your financial advisor and find out if one of these three options is a better long-term choice.