Credit card debt costs Americans a pretty penny every year. Are there cheaper options?

Most people turn to credit cards when they’re cash-strapped, but financial advisers say they should be a last resort and that consumers should consider other options first. 

Credit card debt reached a record $1.03 trillion in the three months ended in June, according to the New York Federal Reserve, and the average interest rate paid by those who carry a monthly balance soared to nearly 23% in August, the highest since at least 2018.

Servicing credit card debt could get even costlier too, if the Fed decides to hike its benchmark, short-term fed funds rate again before the year ends amid its ongoing fight to lower inflation to its 2% goal. 

At those costs, Americans should be looking at other, less expensive ways – like life insurance, family and friends, and even their 401(k) and banks – if they don’t have enough emergency savings and need to tap some short-term liquidity, financial experts say. 

“Using your credit card now should be the ground floor,” said Dan Casey, investment adviser and founder of Bridgeriver Advisors in Bloomfield Hills, Michigan.

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Why shouldn’t I use a credit card? 

Credit cards are OK for small purchases to help manage your monthly cash flow, and if you pay off all or most of the balance on time.  

If you’re using your card to pay for everything large and small, however, and your balance is growing every month, it may be time to reconsider, experts say. Interest rates are so high right now, you’re going to end up paying a lot more to pay off your credit card debt. 

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How can I borrow money immediately? 

Less expensive options if you need some short-term money, Casey says, include from best to worst: 

1. Life insurance. Universal or whole life insurance often includes a cash value feature that allows you to take a tax-free, lower-rate loan while keeping your money invested. “It’s fast, in your account in days,” Casey said. “The only fee is the interest rate, but it’s so flexible that if you lose your job, you can pay it back when you get a job or never pay it back. If you don’t pay it back, they subtract it from your death benefit.” 

1. Family and friends. Asking family and friends to loan you money can feel uncomfortable, but “you can make it legal with a 5% rate and a contract,” he said. 

1. Home equity loan. Terms are flexible and interest rates tend to be lower than on other loans because they’re secured by your home. And if you use the money to build or improve your home, the interest may be tax deductible. However, if you need quick cash and don’t have one open already, it can take up to two months to get one. “The caveat is that you should be confident you can pay it back because your home is at risk,” Casey warned. 

1. 401(k) loan. These have steadily risen since 2020, according to a recent survey by investment firm T. Rowe Price. Interest rates on these are generally lower than some other types of loans, but you’re paying the interest back to yourself instead of a lender. They’re tax- and penalty-free and have no impact on your credit score because they’re not reported to the credit bureaus. Repayments are usually automatically deducted from your paycheck. Beware though, if you lose or change your job, you must fully repay your loan. If you default, it’s considered a withdrawal, and you'll owe both taxes and a 10% penalty if you're under 59½. You'll also lose out on investing the money you borrow in a tax-advantaged account, and your interest payments aren’t tax deductible. 

1. Personal loan. Rates can be high depending on your credit score and history, the amount you need and the lender’s requirements. However, it can also work the other way and build your credit. "Timely repayment of a bank loan can help improve your credit score," said Grace Salvino, wealth manager at registered investment advisor Performance Wealth. And, if you can get a low rate, then a personal loan may be better than a 401(k) loan, Casey noted. Beware though you may owe penalties or fees if you pay off the loan early or miss a payment. 

1. 401(k) hardship withdrawal. These don’t have to be repaid, but the money is permanently removed from your retirement savings. You also must pay taxes and possible penalties on the withdrawal. They also have strict rules: the amount is also limited to what you absolutely need to satisfy your “immediate and heavy financial need” and the “need can’t be relieved from other available resources,” the IRS said. 

What’s the bottom line if you are low on cash?

The days of cheap money are gone with the Fed undertaking the most aggressive rate hike campaign in four decades to battle inflation. Though it’s easy to keep charging on a credit card, financial advisers say you may be better off looking at your budget, figuring out the amount you think you need, and exploring less expensive alternatives to fund short-term needs. 

“But hopefully, you should never be in that position,” Casey said. “Everyone should have three to six months in emergency funds.” 

Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at mjlee@usatoday.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday.

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