Credit cards make it easy to spend, but they can be a pain to pay off when it comes time to pay them off. It's easy to become overwhelmed keeping track of various monthly payments, interest rates, and balances. Furthermore, if you're trying to pay off multiple cards at the same time, it may be difficult to make a significant dent in your debt. You might consider taking out a personal loan to pay off your credit card debt. This type of debt consolidation could save you money on interest and allow you to pay off your credit cards more quickly. Understanding how a personal loan can be used to consolidate credit cards can help you decide if it's right for you.
Important Points to Remember
- Paying off credit card debt can be difficult when you have balances spread across multiple cards with varying interest rates.
- Consolidating credit card balances with a personal loan could help you save money and pay off your debt faster.
- When comparing personal loans, it's critical to consider the interest rate, fees, and loan terms in order to find the best deal.
- You may also consider other debt consolidation options, such as a balance transfer credit card or a home equity loan, in addition to personal loans.
What's the Difference Between a Personal Loan and Credit Card Debt?
Credit cards and personal loans are two different types of credit. What is a personal loan, exactly? A personal loan is a one-time payment of a lump sum of money that you borrow and then pay back with interest. Personal loans can be secured or unsecured. Secured loans require collateral. If you're looking for a personal loan to pay off credit card debt, you're probably looking for an unsecured loan. A personal loan is an example of a debt that is repaid in installments. You can pay down the balance but not add to it. A credit card, on the other hand, is a type of revolving credit that can be used over and over again. Making purchases allows you to borrow up to your credit limit, and as you pay them off, available credit becomes available. A personal loan should not be confused with a personal line of credit, which is a revolving credit product that functions similarly to a credit card.The Advantages of Using a Personal Loan to Pay Off Credit Cards
There are some compelling reasons to consider taking out a personal loan to pay off credit card debt, especially if your current repayment strategy isn't working.Debt Repayment Made Simple
Keeping up with monthly payments is one of the most difficult aspects of carrying balances on multiple credit cards. When you consolidate credit cards with a personal loan, you only have to make one monthly payment instead of several. This can help you manage your monthly budget more effectively. When you only have a single payment to make, you're less likely to miss a payment due date and damage your credit score.Interest can be saved
Taking out a personal loan to pay off credit card balances could save you money if your loan's interest rate is lower than the average rate, and you were paying on your cards.In August 2021, the average credit card APR for interest-bearing accounts was 17.13 percent. According to the Federal Reserve, the average annual percentage rate (APR) for a 24-month personal loan was 9.39 percent. If you have a good credit score, you might be able to get a debt consolidation loan at a lower interest rate. This may save you money, and because more of your payment goes to the principal, you may be able to pay off your debt sooner.It's possible to raise your credit score
Credit score benefits may be obtained by consolidating credit card debt with a personal loan. Amounts owed across multiple types of accounts account for 30% of your FICO credit score. Your "utilisation ratio," or the percentage of your available credit limit that you're using, is an important consideration when it comes to credit card debt. By paying off your credit card debt with a personal loan, you can improve your credit utilisation ratio by eliminating your card balances. The key to maximizing this benefit is avoiding increasing your utilization ratio by making new purchases with your cards and steadily paying down your consolidation loan debt. Important: Obtaining a personal loan can result in new hard inquiries on your credit report, potentially lowering your credit score by a few points.Cons of Paying Off Credit Cards with a Personal Loan
While there are some clear benefits to using a personal loan to consolidate credit card debt, there are also some potential drawbacks to consider.It's possible that you'll end up with even more debt
The temptation to use your credit cards for more spending is one of the biggest risks of using a personal loan to consolidate debt. You've added to your debt pile by using a personal loan to pay off credit card balances and then running those balances up again. In the process, if your credit utilization rises, you may harm your credit score.Fees are possible
Although many lenders offer no-fee personal loans, not all do. A personal loan origination fee, for example, is something you might have to pay. You can avoid hidden or sneaky fees by reading the fine print on personal loans.When it comes to money savings, nothing is guaranteed
Even though personal loan interest rates are typically lower than credit card interest rates, you are not always guaranteed to save money. Your personal loan's APR may be similar to the APR on your credit cards if you have a fair or poor credit score. In that case, consolidating your debts with a personal loan may not save you much, if at all.How to Pay Off Credit Card Debt With a Personal Loan
If you think taking out a personal loan to pay off credit cards is the right move for you, make sure you have a strategy in place first. Select the appropriate loan. The first step is finding the best loan option for consolidating credit cards with a personal loan. Comparing loan fees, interest rates, repayment terms, and qualification requirements from various lenders is a good idea. Pay off debts with loan funds. Although it may be tempting to spend that large sum of money, keep in mind your goal: to pay off your credit card debt. Schedule payments to your credit cards to pay them off as soon as the loan proceeds clear your bank account. Don't take on more debt. Consider putting your credit card balances aside once they're zero, so you're less likely to use them to make new purchases. You may want to delete your card details if you've stored them online at your favorite stores or in a mobile wallet app. This way, instead of using credit, you can pay cash for your purchases. If at all possible, pay off your loan early. Early repayment of a personal loan can save you money on interest and help you get out of debt faster. Switching to biweekly payments, for example, could cut the loan term in half. Important: Before paying off your loan early, ensure you know if you'll be charged a prepayment penalty.Other Options for Paying Off Credit Cards
Personal loans aren't the only option for getting out of debt.Snowball of Debt
The debt snowball method is a method of paying down debt in proportion to the amount owed. You sort your debts by the amount owed, starting with the smallest balance and working your way up. Then, while paying the minimums on your other debts, you pay as much as you can toward the smallest balance first. You roll the payment over to the next debt on the list once you've paid off the first one. You keep making payments this way until you're left with only one large payment to make to the previous debt on your list.Balance Transfer with 0% APR
A balance transfer is when you pay off one credit card with another. It's possible that you'll have to pay a balance transfer fee. You can save money by transferring your balance to your new card if it has a 0% APR. However, keep in mind that this APR usually only applies for a limited time. The regular variable APR kicks in after the introductory APR expires.Home equity loan or credit line
A home equity loan is a kind of loan that lets you borrow money based on the value of your home. A home equity line of credit (HELOC) is similar to a home equity loan, but instead of a lump sum, you get a revolving credit line. Both of these options can be used to consolidate debt. Keep in mind, however, that if you default on a home equity loan or HELOC, you could lose your house to foreclosure.Negotiate a Better Deal
To save money, you could try haggling with your credit card company for a lower interest rate. Your account history and card balance determine your credit card company's willingness to lower your rate. However, it's worth calling to talk about how you can get your debt under control.Take into account a debt management plan (DMP)
If you're having trouble paying off your credit cards, a debt management plan might be able to help. Credit counseling agencies may offer you this type of plan, which allows you to make one monthly payment toward your debt. The credit counsellor then divides your payment between your creditors. If your credit counsellor can negotiate lower rates or fee waivers on your behalf, debt management plans can help you save money. Sticking to your debt repayment plan can also help you get out of debt faster. Look for a nonprofit agency affiliated with a national accreditation agency when looking for credit counselors. Tip: When looking for credit counselors, look for a nonprofit organization affiliated with a national accreditation organization.The Final Word
Taking out a personal loan to pay off credit cards could help you pay off your debt faster while saving money on interest. Debt consolidation may or may not be right for you depending on your budget, spending habits, and the interest rates you're likely to be approved for with a personal loan. Other options for managing credit card debt and personal loans include a balance transfer offer or debt management.Most Commonly Asked Questions (FAQs)
How can I pay off my credit card debt if I don't have any money?
If you're having trouble finding money to pay off credit card debt, you might want to meet with a nonprofit credit counselor. A credit counselling agency can assess your debt, budget, and spending to determine whether you have sufficient funds to pay off your credit cards.Should I use another credit card to pay off a credit card?
If your new card has a lower APR, using a credit card to pay off another credit, i.e., a balance transfer, could save you money. To make this strategy work, you must pay off the transferred balance before the promotional APR period ends.How much can I get a personal loan for?
The amount you can take on a personal loan is determined by the lender, your credit score, and your financial circumstances. In 2020, the average personal loan balance was $16,458, though lenders may offer personal loans up to $100,000.