Why Pay Off Credit Card Debt With A Personal Loan
Most credit cards let you make a minimum monthly payment that barely covers your interest charges, but hardly pays down any of your principal. As a result, it can take decades to pay off credit cards making only the minimum payment. That can add up to thousands of dollars in extra interest charges.
You can accelerate payments on credit card debt without using a personal loan. But consolidating credit card debt at a lower interest rate makes it easier to pay it down faster, with more of your monthly payment going toward loan principal.
This is also an opportunity to lock in a fixed interest rate and monthly payment. And if youre consolidating debt paying off several credit card accounts with a personal loan youll be able to make one monthly payment, instead of keeping track of all your card payments separately.
Before you borrow, estimate how much youll pay for a loan using our personal loan calculator below.
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Apply For A Balance Transfer Credit Card
A balance transfer credit card can help you consolidate your credit card balances onto a single card, which often makes it easier to pay off your credit card debt. Many of the best balance transfer credit cards give you between 12 and 18 months of 0 percent intro APRto help you pay down your balances while avoiding interest charges.
Does Getting A Personal Loan Help Your Credit
Getting a personal loan and making all your payments on time can boost your credit in a number of ways. A personal loan appears on your credit report as an installment loana type of loan that has a specific loan amount and a set repayment schedule. Installment loans are different from the revolving debt you may carry on credit cards. Adding an installment loan to your “credit mix” can improve your credit score because it shows that you can manage different types of debt.
Making monthly loan payments on time adds to your successful payment historyand that’s significant. Your payment history accounts for 35% of your FICO credit score and is, in fact, the biggest factor in determining your score.
Be aware that a new personal loan can put a momentary drag on your credit score. Lenders typically run what’s called a hard inquiry on your credit when you apply for a loan. These can lower your score by a few points, though the effects are temporary. A new loan also reduces your average age of accounts. This problem starts to resolve itself as you pay the loan off over time, building your history as you go. Initially, however, new accounts make your credit look less “mature.”
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Is Credit Card Consolidation Right For Me
Not everyone will find the terms of a credit card consolidation loan to be in their best interest. Consolidation may help if youve been carrying a balance on one or more cards for most of the year or if you are paying the maximum interest rate allowable by law on any of your cards.
The best way to tell if credit card consolidation is the answer, however, is to do the math. If you can get a lower rate with a loan , consider how much a consolidation may save you over the next few years. Credit card consolidation loans are also perfect for anyone who needs a structured plan to get out of debt in a set amount of time. If youre looking to buy a home in five years, for example, a credit card consolidation with a 5-year term may get your debt paid down in time to bring your credit risk in a better place for a mortgage. Choose one with a 3-year term, and your payments will be larger, but your debt gets paid quicker!
Will Paying Off Your Loan Put You At Risk
Using your savings to pay off a loan may save you money on loan interest. But it could also diminish your ability to cope with a financial emergency if one arises. This is less of a concern if your savings are ample, with more than three to six months of expenses in an emergency fund. If your savings are slim, you might want to make sure you aren’t putting your financesand your ability to maintain your clean credit historyat risk by paying your loan off in a lump sum.
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Start Using Your Credit Cards For Purchases You Can Afford
Theres no reason to give up using credit cards foreverthere are so many benefits to using credit, including the ability to earn rewards on your purchases. That said, try to use your credit cards only for purchases you can afford. Credit card debt is expensive, time-consuming and much more trouble than its worth. Thats why many people use personal loans to pay off their credit card debt and give themselves a fresh start.
Using A Personal Loan To Pay Off Credit Card Debt
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People talk all day long about their workouts, favorite apps, and their love lives, but bring up the subject of money, especially credit card debt, and suddenly everyone clams up.
But just because we dont talk about debt doesnt mean its not an issue. After all, the average American household carrying a credit card balance has over $5,500 in credit card debt in 2021. But how do you pay off credit card debt? One method to consider: taking out a personal loan.
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Put Yourself On A Debt Freedom Schedule
This type of debt consolidation has three major benefits:
- Only one monthly payment instead of several
- Lower interest costs
- Debt freedom date locked in
Once you pay off your loan, you may find yourself completely debt free. If you have any student loans, auto loans, or mortgage loans, at least your highest interest debt should be taken care of. Take this opportunity to avoid getting back into any new debt in the future.
A personal loan typically comes with a fixed monthly payment for a certain period of time. If every payment is made on time for the life of the loan, the balance will be zero at the end and you won’t have any credit card debt leftover to worry about.
How To Apply For A Personal Loan
Whenever you ask a lender for any kind of credit, you’ll have to go through the application process. However, before you submit a personal loan application, it’s important to review your credit report and your credit score, so you’ll understand what lenders might see when they pull your credit report and scores. Remember, checking your own credit report never affects your credit scores, so you can check as often as you need.
Once you’ve reviewed your credit and taken any necessary steps based on what you see, you can apply for a personal loan through any financial institution such as a bank, credit union or online lender. Every lender you apply to will check your credit report and scores.
Lenders will usually consider your credit scores when reviewing your application, and a higher score generally qualifies you for better interest rates and loan terms on any loans you seek. The lender will also likely look at your debt-to-income ratio , a number that compares the total amount you owe every month with the total amount you earn. To find your DTI, tally up your recurring monthly debt , and divide by your total gross monthly income . You’ll get a decimal result that you convert into a percentage to arrive at your DTI. Lenders like to see DTIs under 36%, but many may provide loans to borrowers with higher ratios.
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First What Is A Personal Loan
Most of us know all about credit cards, but personal loans may be new to you. A personal loan allows you to borrow money for a variety of reasons, including debt consolidation, emergency expenses, and home improvements. You can get a personal loan from a bank, credit union, or online lender. The terms and requirements vary based on the source of the loan and your own financial profile.
A personal loan works much the same way that auto, mortgage, and student loans operate. You apply for your desired amount, and the lender uses your credit report and history to determine whether you qualify and at what interest rate. Generally speaking, the better your credit is, the lower your interest rate will beand the more youll save on total interest. You then repay the loan in monthly installments until the debt is paid off.
There are a few different flavors of personal loans. For example, some lenders dont require a credit check. These loans tend to be smaller and have very high interest rates. There are also car title loans, which are short-term loans that use your vehicle title as collateral. These loans also tend to have very high interest rates. However, one of the most common types of personal loan is an unsecured loan, or not backed by collateraland a credit check is usually required.
When Should You Use A Personal Loan For Credit Card Debt
Personal loans can be a great way to pay off credit card debt as they have fixed interest rates and fixed repayment terms, typically between 12 to 60 months.
The process for refinancing or consolidating credit card debt is simple, too: Youll shop for and apply for a personal loan that has more favorable terms than youre currently paying on your credit cards. The amount you apply for should equal your outstanding debt. If approved for the loan, youll use the funds from the personal loan to pay off your credit card balances, and then make payments as usual on your personal loan.
Whether using a personal loan to pay off debt is right for you depends on several factors, including the amount of credit card debt you have, your credit score and the loans affordability.
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Standard Apr Credit Cards
Student loans, a common debt that many people look to offset with the aid of a credit card, are normally lent at a 7% APR. After refinancing, this rate can drop to as low as 3%. The average credit card APR is 15%. You dont have to be a math whiz to recognize that moving debt to a standard credit card, without the crutch of a promotional low APR, will nearly double interest payments.
Regardless, some people decide to move loans to credit cards with standard interest rates and incur the added cost to reap benefits like airline miles, fuel points, etc. This is generally not a good idea unless you plan on paying off the full balance immediately before interest charges accrue.
Paying Off Credit Card Debt
If you have several credit cards, first make a list of your current balances, APRs, minimum monthly payments and due dates. That will help you figure out how to begin your payoff journey. Here are a few paths you can take:
- Debt avalanche method: The most cost-saving payoff method is to target the credit card with the highest APR first, also known as the debt avalanche method. Using this strategy, you pay as much as you can on that card while you pay just the minimums on the rest of your cards. Once you pay off that card, you’ll move to the card with the next-highest balance and employ the same strategy until all your cards are paid off.
- Debt snowball method: You might prefer paying off small balances first, which is known as the debt snowball method. Doing so won’t save you as much money as paying off credit cards with the highest APRs first, but it can be effective if experiencing a series of small winsby paying off accounts more quicklyencourages you to continue attacking debt.
- Balance transfer credit card: If you have good or excellent credit, you may also qualify for a balance transfer credit card. This gives you the opportunity to move multiple credit card balances to a single card, potentially at 0% APR for a period of time. You can pay off debt interest-free if you get rid of the balance by the time your promotional period endsa crucial component of the strategy so you can avoid paying a much higher standard APR.
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Other Ways To Consolidate Credit Card Debt
Personal loans arent the only or necessarily best way to consolidate credit card debt. Like we mentioned before, balance transfer credit cards can oftentimes make more sense than a personal loan. And for borrowers with poor personal credit, you may need to consider other alternatives, such as a secured personal loan or cosigned loan.
|Secured personal loan||
|Cosigned personal loan||
|Home equity loan or line of credit||
If You Have A Complaint About An Early Repayment Charge
If for any reason you arent satisfied with how lenders have dealt with your early repayment, you should complain. For example, if you think youre being overcharged or treated unfairly.
It’s usually a good idea to complain to your lender first. If youre still not satisfied, you can take your complaint to the Financial Ombudsman Service if necessary.
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When Does It Make Sense To Use A Personal Loan To Consolidate Your Credit Card Debt
Personal loans which can be used as debt consolidation loans, depending on the lender tend to offer lower interest rates than credit cards. So, if youre juggling multiple credit card payments per month and paying high interest rates on that debt, it makes sense to consolidate your credit card debt into a single personal loan with a lower interest rate than what youre currently paying.
But keep in mind that most lenders typically have minimum loan amounts of $1,000 to $5,000. Because of this, personal loans may only be a good option if your debt lands within that range.
Example 1 How Much You Could Save By Switching To A Cheaper Interest Rate
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As you can see from the above example, if you go for a shorter-term loan your monthly repayment might go up. But youll cut your costs because the total amount of interest you pay will be lower and youll have paid off your loan earlier.
Make sure you can afford the higher monthly repayment before you switch.
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Repayments And Interest Rates
While unsecured personal loans donât usually carry an interest rate as low as a secured loan, such as a home loan, they typically have a lower interest rate than credit cards.
With a personal loan, youâll have to pay back a certain amount each month over a set period of time . This amount will consist of interest and principal. If you opt for a fixed rate loan, youâll easily be able to budget for repayments as theyâll remain the same over the life of the loan. If you opt for a variable rate loan, your loan repayments may change as interest rates change, making it harder to budget for your repayments. The upside of a variable rate – youâll be able to have access to a redraw facility on your loan, which comes in handy if you need money unexpectedly. With both our fixed and variable rate loans youâll be able to make additional payments and repay the loan early without incurring fees. Learn about our personal loan interest rates.
Choosing Between A Credit Card Or Personal Loan
Unsure whether you need a credit card or a personal loan? Weâll give you the rundown on how they both work.
Upcoming travel, car upgrade, Christmas festivities or home renovations on the horizon? If you need access to money to cover costs like these, you might be considering a personal loan or . Choosing between the two can be tricky. Weâll explain the differences and why one may be a more suitable borrowing option for you.
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