(NewsNation) — Outstanding credit card balances nationwide totaled $1.17 trillion at the end of quarter three this year, according to the Federal Reserve Bank of New York’s Center for Microeconomic Data.
Household debt grew by $24 billion from the previous quarter — 8.1% above the level a year ago.
The five major categories of consumer debt are home mortgages, home equity lines of credit, student loans, auto loans and credit cards. Auto loans and credit cards are seeing an increase in delinquency rates.
“Nationwide, overall consumer debt levels have been growing slightly faster than income,” according to a report in August from New York City Comptroller Brad Lander.
So, you’re in debt and can’t manage it. What do you do?
Two options include debt consolidation and debt settlement, but one carries more risks.
What is debt consolidation?
Debt consolidation is the process of combining your debts into one, leaving you with one payment, which can be easier to manage.
There are two ways to achieve this: Balance transfer cards or debt consolidation loans.
A balance transfer is a refinancing method that allows you to move debt from a high-interest credit card to a new card with a lower rate, often a 0% interest rate for a temporary time.
Transfer fees typically apply, about 3% to 5% of the total balance. Once the transfer is complete, you can begin paying your debt without interest.
“A 0% balance transfer credit card is about the best weapon in your arsenal against credit card debt,” said Matt Schulz, LendingTree’s chief credit analyst, to NewsNation recently.
Once the promotional period of no interest is up, you will pay the regular annual percentage rate, so it’s a good idea to attempt to pay off the balance before then.
To qualify for a balance transfer, consumers usually will need a good credit score of 690 or higher. Applying for one will affect your credit score but not dramatically.
Debt consolidation loans, meanwhile, are best for a mix of debts, not just credit cards.
In this process, you apply for a new loan from a bank, credit union or online lender. The money from this loan will pay off your other debts. You will be responsible then for paying back the new loan over two to seven years.
While you will still be in debt, you will only have one creditor to pay back under a debt consolidation loan.
People with poor credit have options to secure debt consolidation loans.
What is debt settlement?
Debt settlement, also called debt relief, is a way to resolve debt for a lesser amount than you owe.
If a creditor doesn’t think you’ll be able to pay back your debt, they may agree to let you pay off your credit card for less than the outstanding balance, thus “settling” your debt. But more often, third-party companies will help negotiate for you — at a cost.
For-profit debt settlement companies often encourage you to stop paying your credit card bills to gain leverage in a settlement, which can damage your credit score. They can also charge expensive fees.
And it’s never guaranteed that a creditor will agree to settle your debt, leaving room for uncertainty in the process.
Experts recommend enlisting the help of nonprofit credit counseling companies, who can help you devise a repayment plan.
Debt settlement will reflect on your credit score as “settled” rather than “paid in full,” so someone in debt should consider those risks.
NewsNation’s Andrew Dorn contributed to this report.