Got Credit Card Debt? Here's a Way to Pay It Off
That number -- $15,863 -- is nearly twice the level of debt ($8,300) that credit card resource website CardHub says is "unsustainable." But instead of working this debt level down, consumers are growing their credit card debt levels, NerdWallet statistics show, with May figures (the latest available) clocking in at about a 2.11 percent annualized growth rate compared to April, and 3.19 percent compared to May 2014.
None of the above sounds particularly encouraging. But one company thinks it has found a solution nonetheless.
Billing itself as a "next generation financial services company," 6-year-old Payoff.com of Costa Mesa, California, says it's on a mission to help consumers get control of their credit card debts and pay them off for good -- "faster, easier, and cheaper" than traditional banks might prefer.
According to S&P Capital IQ, Payoff.com is a privately held company, and its partner First Electronic Bank, which provides the funds for its loans, is similarly privately owned. Thus, neither company needs to charge high rates to keep public shareholders happy and rolling in profits.
So What Do They Do?
Say you're an incredibly "average" credit card holder, owing about $16,000 on several credit cards, and paying 15 percent annual interest on these cards. (Bankrate.com (RATE) subsidiary CreditCards.com confirms that rates have averaged about 15 percent over the past six months). That's right in the sweet spot for the customers Payoff is trying to help. According to the company, it offers "Payoff Loans" of anywhere from $5,000 to $25,000 to help consumers get out of debt.
Payoff does this by first requiring you to fill out an online application for a loan. Be aware -- Payoff currently operates in 29 states and the District of Columbia. It doesn't, however, currently operate in: Alabama, Arkansas, Colorado, Connecticut, Delaware, Illinois, Indiana, Iowa, Kansas, Louisiana, Maine, Massachusetts, Minnesota, New Hampshire, New Jersey, Pennsylvania, South Dakota, Texas, Vermont, Wisconsin or Wyoming.
Here's Your Money...
Once you've been approved, the company deposits a loan, sufficient to pay off your credit card debt, directly to your bank account. Note that you should ask for a bit more than you owe, however, to account for the Platform Fee. (More on this in a moment).
Use this money to pay off your cards. At this point, you owe no credit card lenders. Your only debt is to Payoff.com.
Ideally, Payoff's loan will carry an interest rate lower than what your credit cards were charging. Examples given on the company's website suggest that a 15 percent or 20 percent variable interest rate, charged by a credit card-issuing bank, might be replaced with a fixed-rate Payoff loan of as little as 13 percent (rates can, however, range from as much as 19.65 percent to as little as 6 percent, depending largely on the duration of the loan you request).
Now for the "Platform Fee." Essentially an origination fee covering the overhead and costs for providing you the loan, Payoff charges 2 percent to 5 percent of the loan amount up front. This Platform Fee is deducted immediately from your loan, which is why you'll want to request a total loan amount a bit more than the value of the credit card debts you plan to pay off.
In the interests of full disclosure, Payoff incorporates this Platform Fee into the annual percentage rate on the loan it quotes you, telling you the notional APR so that you know what the interest rate would be, if the Platform Fee were spread out over the cost of the loan (instead of being paid off up front, as it is in fact). Thus, for example, Payoff would describe a loan at 6 percent actual interest as costing you 8 percent APR; a 19.65 percent interest rate would similarly be quoted at 22 percent -- so that you know the true cost of the loan you are getting.
Crucially, though, this Platform fee is the only fee Payoff ordinarily charges for its loan. (There may be a returned payment fee if one of your payments bounces, however.) In particular, Payoff does not charge late fees, eliminating a major stumbling block to many consumers' journey out of debt.
A Payoff customer service representative contacted by phone, Lisa, warned that it's difficult to give a precise rate without knowing a customer's financial information, which requires a credit check. But even so, the company's online calculator suggests that a $16,000 loan, taken out by a customer with a merely "good" FICO score of 660 to 690, could save as much as $19,673 and pay off his or her debt 31 years faster using Payoff.com, as opposed to paying off a 15 percent interest rate on a credit card with minimum payments. The time needed to pay off a Payoff loan varies with the customer, of course. A Payoff representative named Billy noted that customers are given as many as 15 different options to choose from, offering the ability to pay either more than, the same as, or less than their former monthly credit card payments. And generally speaking, the more you pay per month, the faster you'll pay off your debt.
Which sounds like a pretty good deal. If you happen to live in one of the 29 lucky states (and one District) that Payoff serves, it might be worth the 60 seconds it takes to fill out an application, and see if they can give you a good rate.
Motley Fool contributor Rich Smith has a lot of credit card debt ... and he pays it off in full every month. (He doesn't imagine the credit card companies are very happy about that.) In the spirit of full disclosure: When putting together the list of states where Payoff doesn't operate, he had to use spell-check to get the spelling on "Massachusetts" just right.
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