How to Make Debt Less Costly When You Need It in a Crisis

The coronavirus pandemic that upended the U.S. economy has resulted in widespread job and income losses and added to the debt load for millions of Americans. More than 2 in 5 U.S. adults (42%) report that their household financial situation has worsened since the pandemic’s onset, according to NerdWallet’s annual household debt study, while just 14% say it has gotten better and 43% say it’s stayed the same. Of those who report a worse situation, close to half (45%) say they’ve taken on debt because of it.

Taking on debt may be unavoidable under the circumstances, but there may be ways to reduce the cost of that debt in terms of interest or fees. Depending on your personal situation, you might have more affordable or accessible options.

For good/excellent credit: Balance transfers, 0% credit cards, personal loans

Balance transfer credit card offers got harder to find during the pandemic as card issuers looked to reduce their risk. But those with good credit to excellent — generally defined as credit scores of 690 or higher — can still find them. If you have a balance you can’t reasonably pay off in the next few months, transferring it to a card with a 0% introductory offer could help you avoid interest for a year or more. Balance transfers typically incur a fee, though.

If you expect you may have to carry a credit card balance in the near future — because of a disruption in income, for example — a card with a 0% introductory rate on purchases can offer breathing room for a year or more. For those who need more time, a low-interest personal loan may be the better choice. You can also use a personal loan to consolidate existing balances, making it a good option if the 0% period on a balance transfer card wouldn’t be long enough for you to wipe out the debt before the rate rises into double digits.

For fair or poor credit or no credit history: Emergency loans

If you need cash fast but don’t have a good credit history, an unsecured emergency loan may be the way to go. Depending on your credit, these can have high interest rates, so this should be thought of as a fallback if you can’t borrow from family, get assistance from a nonprofit or religious organization or qualify for a 0% credit card.

Members of a local credit union might be able to get better terms and lower rates on an emergency loan, as they consider your entire financial situation instead of just your credit score. Emergency loans may not be ideal from a cost perspective, but they are there for those who don’t have good alternatives.

For those with 15% or more home equity: HELOCs

If you have sufficient equity in your home and need access to credit, tapping a home equity line of credit, or HELOC, will probably be less expensive than piling up a credit card balance. A HELOC allows you to borrow against your home equity, which is the value of your home minus the amount you owe on the mortgage.

To qualify for a HELOC, you’ll generally need equity of at least 15% of your home’s value, a credit score of 620 or higher and 40% or less for a debt-to-income ratio, which is the percentage of your gross income taken up by debt obligations.

Interest rates on HELOCs tend to be adjustable, so they can go up and down. Try to get quotes from a few different lenders so you know you’re getting the best rates available. Pay attention to the lifetime cap, which is the highest rate you can be charged. If you don’t think you can reasonably afford payments at the highest rate, it’s probably not worth it, as a HELOC carries a risk of losing your home in foreclosure if you can’t repay your debt.

For medical bills: 0% payment plans, medical credit cards, income-based hardship

Among Americans who report worsened finances since the onset of the pandemic, 14% say they took on medical debt or additional medical debt, according to NerdWallet’s study.

If you have outstanding medical bills, ask your medical providers if they offer payment plans; if so, find out about interest or fees. Some providers will allow you to make equal monthly payments within your budget, which can be a good option if there aren’t costly fees tacked onto your balance.

When an affordable payment plan isn’t an option, a 0% interest medical credit card could help you avoid interest for a certain period of time (generally six to 12 months). Keep in mind that some medical cards charge deferred interest. This means that if you don’t pay the balance in full by the time the no-interest period expires, you will owe interest on the entire original balance going back to the start.

Depending on your income, you may be eligible for a hardship plan, which can reduce your payments as well as the total amount you owe. Ask your provider if this option is available.

For multiple unsecured balances: Debt management plans

A debt management plan can be a good choice if you can’t reasonably make your existing credit payments each month. You’ll work with a credit counselor who will be an advocate for you, trying to get better terms on your existing balances and consolidating your unsecured debts into one monthly payment you make to the credit counseling agency instead of to your creditors.

If you go this route, look for a nonprofit agency accredited by the National Foundation for Credit Counseling. You’ll probably have to close your credit card accounts when going through a debt management program.

For those who are unemployed: Credit unions, crisis relief loans