How You Can Save Hundreds By Refinancing Your Credit score Card Debt
I probably don’t need to tell you about the dangers of debt. Unfortunately, it can get out of hand. This is especially true of credit card debt: the bane of financial health everywhere.
Aside from the exorbitant amount of student loan debt most doctors carry, credit cards are widely used to cover expenses by medical school and resident. Because of this, it’s not uncommon for a doctor to have thousands in consumer debt by the time they graduate.
In addition to my student loans, during my college and medical school years, I had credit card debt in excess of $ 20,000 – some with interest rates in excess of 20%. I fully understand how difficult it is to get out of it. I didn’t know any better.
While I don’t think all debts are badCredit card debt is certainly not ideal. Not only does it bear the burden of high interest, but it can also be a major obstacle on the way to financial freedom. After all, if you have to use a large portion of your income to pay off debt, it is less money work for you.
When you have a large amount of consumer debt (whether in the form of credit cards or even high-interest loans) the obvious solution is to pay it back. However, sometimes other expenses come first (school, family, house, car, etc.) and you just can’t pay them off in a short time.
Fortunately, there are great ways to reduce the total amount you end up paying while keeping monthly payments manageable.
How To Manage Debt By Refinancing
With a mortgage or car payment, it is common knowledge that you can refinance a lower interest rate and / or better terms and take advantage of it when a better interest rate is achieved (or when your credit rating improves).
But have you ever thought of doing the same with credit card debt?
Usually, the only way to get a better interest rate on a credit card balance is to transfer it to a card with better terms. While this can reduce the stress for a while, it is a temporary solution at best.
A much better solution is a low interest personal loan that is specially designed for doctors and dentists.
For example, a lender like Doc2Doc Loans only works with doctors. Taking out a loan at a much lower interest rate and paying off your high-interest debt is a great way to save big money in the long run. Then of course it is the way to go to pay it off asap.
Let’s say a doctor, Dr. Maria, has $ 20,000 in credit card debt with an annual interest rate of 18.9%. The minimum monthly payment to cover interest and fees is the usual 3%, which equates to USD 600 per month. It takes 25.3 years to repay the balance and total payments over the life of the loan are $ 41,767.27.
And if that wasn’t bad enough, a revolving balance that exceeds 22-28% of your credit limit will adversely affect your FICO score.
Let’s say Dr. Maria joins Doc2Doc Loans and is approved for a $ 20,000 personal loan at 9.99% interest (an average number for a loan of this type). With these terms, she pays $ 416.35 per month and her loan will be repaid in 5 years.
When all is said and done, the total will be $ 25,380.74 – far from the $ 41,767 she would ultimately have paid with her credit card. She also has the option to repay her loan in full at any time with no prepayment penalty.
Since a loan from a lender like Doc2Doc is an “installment loan,” each consecutive on-time payment will be rated positively on their FICO report rather than harming it.
This is where the doctor-specific part comes into play. Let’s assume for a moment that Dr. Maria is living in the second year under anesthesia when she borrows the money. All residents have the option of a “hybrid” payment where they only have to pay interest for half the loan term to improve monthly cash flow when funds are scarce.
That way, their rate would be 11.99% (APR 12.9%) and their monthly payment would be $ 199.84 for the first 2.5 years. When she graduates and starts her first job, she will pay back the loan in full within 6 months. In this case, she paid a total of $ 25,970.
As you can see, in such a situation, it makes far more sense to refinance by taking out a loan with a lower interest rate. With the option of only making interest payments during your stay, these monthly payments are much easier to manage.
Refinancing versus payout
Conventional wisdom says that with any debt (especially high interest rates) the most important thing you can do is to pay it back asap.
While this is great in ideal circumstances, sometimes it makes more financial sense to repay it gradually.
Sometimes you just can’t pay it off quickly (due to other expenses, sufficient income, etc.). Sometimes larger monthly payments run the risk of losing cash flow.
For example, if you can refinance your high-interest debt at a more reasonable interest rate, you can make maximum use of the contributions to your retirement account. This is a must – especially if your employer has your contributions (The White Coat Investor has A great article on this).
Personally, I’ve found that allocating funds for passive income investments can be worth more than the interest cost of certain debts. For example, I wrote about how my $ 85,000 student loan debt will be paid in full from the cash flow of a single $ 35,000 investment (read about this Here).
That goes for student loans, of course, in my case, but the same principle could apply to any debt – like a doctor’s loan. The key is to be very aware of where your money is going and let it work for you wherever possible.
The best way to tackle high interest debt is to think of it only as part of your overall financial plan. Yes, you want to get rid of it asap, but only if it makes financial sense. Regardless of whether you cash it out quickly or slowly, it’s important that you set yourself this goal and stick to it.
Refinancing this debt is not a way to delay payment – far from it. Rather than having to live under the burden of making monthly payments that will ultimately cost you more money, it is better to get them to a manageable point, take the weight off your shoulders, and keep moving closer to your goals.
Disclosure: I am a Doc2Doc Lending advisor, but this is not a Sponsored Post.