OPM: Other People’s Money. In the real estate world, this is a common way of doing business. You use as little of your own money as possible to purchase a property and borrow the rest. This leverage allows the investor to receive the highest possible return with the lowest possible amount of cash.
Wouldn’t it be nice if you could apply the idea of OPM to paying off your credit cards?
Well, you can.
Nobody likes getting too deep into credit card debt. Once you’re underwater, getting back out again can be difficult if not impossible. But there are alternatives to the damage of bankruptcy that smart consumers can use to get out of credit card debt and stay out. Best of all, many of these options allow you to, in some part, use other people’s money.
Balance Transfers
Using a balance transfer credit card is one of the best ways to use OPM to pay down your credit card debt. Simply put, you apply for a credit card with two features: a spending limit large enough to pay off the rest of your current debt, and a 0% introductory APR period.
Using that card, you pay down all of your other debts at once. Then, you begin paying off that card’s total balance with the same payment you were making on the original debt each month. Since there is a 0% APR in place, you’ll be paying off more of your debt and less of the compounding interest, basically using the credit card company’s money to pay down your debt.
The key is to find an introductory 0% APR period that’s long enough to allow you to pay off all your debt before the period ends, thereby maximizing the amount of debt vs. interest payments.
Home Equity Line of Credit
If you own a home, there’s a way to use any equity you have to pay off your credit card debt. A HELOC has an historically much lower interest rate than credit cards: an average of 4.5% versus 16.5%, respectively. By obtaining a HELOC and using the capital to pay off your credit cards, you can pay off your debt up to four times faster, using the bank’s money instead of yours.
It’s also important to note that even if you are unable to make your full monthly debt payment – which is why you’re looking to lower your payment – the dramatic difference in the interest rate you can obtain through a HELOC (and then next option we’ll discuss) allow you to make a lower monthly payment and pay off your debt faster.
Debt Consolidation Loan
With a debt consolidation loan, a company like Credit Direct uses their money to pay off all your debts, allowing you to make one, monthly payment in return, typically at a lower overall interest rate. This is one of the best OPM options because it allows you to pay off all your debts at one time without any additional risk to your own capital.
Additionally, a debt consolidation loan comes with no potential risk to your credit score. Though the interest rate may be based on your current score, it has been shown that a debt consolidation loan is more likely to help your score improve by eliminating the number of open accounts on your report.
Monetize Your Hobby
Time is often a more limited commodity than money, so taking a second job may not be an option to help you pay off your debts…or the fact of the matter is you’re already working two or even three jobs. But what about your hobby? Is the activity you enjoy in your spare time something that can potentially earn a few extra dollars?
The last twenty year has given rise to “the gig economy,” where websites like Upwork and Fivver allow people to freelance in their spare time. Websites like eBay and Etsy have given a marketplace to artisans and crafters. This may be a fun way for you to bring in a little extra cash from other people that you can use to pay down your debts.
Debt Settlement
Debt settlement is one of the most significant ways of using other people’s money to pay off your credit card debts but should be considered the last resort. Debt settlement is the process of negotiating with creditors to reduce overall debts in exchange for a lump sum payment. A successful settlement occurs when the creditor agrees to forgive a percentage of the total account balance.
A debt settlement may reduce your overall debt by half, but can cause short-term damage to your credit score. It is always better to find a way to pay off your debts, but it’s important to find the method of OPM that works best for you, your family and your future.