When Should You Use A Loan To Pay Off A Credit Card Balance
Essentially, when you take out a personal loan to pay off credit card debt, youre moving money around, not paying off debt. For this reason, its not always the right option to take out more debt to repay debt. Although, there are exceptions to this rule.
If You Qualify For A Lower Interest Rate
The first exception is if you can snag a lower interest rate on your personal loan. Credit card interest rates are very high, usually around 20%. If your personal loan has a lower interest rate, youll likely pay less for the money you borrow. Although, if you expect you can pay off your credit card debt in a shorter period of time than you would a personal loan, you might end up paying more interest with a personal loan.
If You Have Other Debt To Pay Off
The second exception is debt consolidation. If you have numerous credit cards and other unsecured debts, it can become challenging to manage them all at the same time. You can use a debt consolidation loan to repay all of the unsecured debts youre carrying then focus on repaying the personal loan. One monthly payment is easier to manage than multiple.
If You Cant Pay Off Your Full Balance
How Does Debt Consolidation Work
One way to consolidate multiple debts is to use a personal loan. When you apply for a personal loan, you apply for a lump sum of money that typically gets deposited into your bank account so you can use it as needed.
When using a personal loan for debt consolidation, though, the lender may make a direct payment to the lenders who hold your other debts. Then, you’ll only be responsible for paying back the new personal loan at a fixed monthly payment and a new interest rate.
Often times, this interest rate is lower than the rates you’ve been paying on your other debts. A lower interest rate means you’ll spend less money on payments over the lifetime of the loan. And, you may actually pay off the loan faster since it may buy you more room to put a little extra cash toward the principal.
Of course, though, the interest rate you receive will depend on your . In other words, a higher credit score can get you a lower interest rate and a poor credit score can leave you with an interest rate on the higher end of a lender’s range.
When Does It Make Sense To Pay Off A Loan With A Credit Card
The core question to answer is whether you will pay less interest when you pay down a loan with a credit card, or whether you’ll end up paying more. And that really depends on whether you think you can clear your zero percent card’s balance before its promotional period ends and its Annual Percentage Rate shoots up sometimes into the double digits.
Another thing to consider is whether your credit card and loan APRs are fixed or variable.
Your credit card APR might be lower than your loan right now, but if it’s a variable APR, there’s a chance that it could increase based on changes to your credit score, prime rates and more.
Something else to consider is your . If your income is volatile and there’s a chance you might be late with a credit card payment in the time it takes to pay off the loan, then your credit score could drop. And if that happens, your APR could increase, causing you to pay more in interest over time.
Also Check: Best Buy Credit Card By Citibank
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.
Enter your loan information to calculate how much you could pay
|All APRs reflect autopay and loyalty discounts where available | LightStream disclosure | 10SoFi Disclosures | Read more about Rates and Terms|
Make Sure Youre Actually Saving Money
As too many scientists at the beginning of that horror movie should have reminded themselves: Just because you can do something, doesnt mean you should. So should you pay off your personal loans with a credit card?
It depends. Obviously, there are upsides, like the fact that your personal loan will be paid off. But as we said above, since a credit card is essentially a loan, is that really an upside at all?
And then there are the drawbacks
The main drawback to doing this is that youll typically pay a balance transfer fee, which can be anywhere from 1% to 5%, depending on the card and if theres a promotional offer, warned Luthi. Also, credit cards charge a lot higher interest rates than some of the best personal loans, so Id only recommend considering it if your personal loan interest rate is higher than your credit card interest rate.
If you have a credit card and are dealing with high-interest debt from a no credit check loan like a payday loan or title loans, then transferring that debt to your card will almost certainly save you money. But with traditional loans, it may not work out as well.
Also Check: Credit Cards That Use Transunion For Approval
The Debt Avalanche Method
With the debt avalanche method, youll start paying off your credit card with the highest interest rate, then youll work your way down to the next card with the highest interest rate.
Follow the steps:
Step 1: Continue to make the minimum payments on all your credit cards.
Step 2: Use any extra money to pay off the credit card balance with the highest interest rate.
Step 3: When the credit card with the highest interest rate is paid off, move on to the next highest interest rate card.
Step 4: Continue this process until all your credit card debts are paid off.
The avalanche method can help you pay less interest and get out of debt faster since youre working towards paying down your higher-interest accounts first.
Earn Credit Card Rewards For Paying Student Loans
InvestopediaForbes AdvisorThe Motley Fool, CredibleInsider
Student loan debt is now one of the most extensive forms of consumer debt in the country. According to data from the U.S. Department of Education, as of 2021, approximately 42 million have student loan debt totaling roughly $1.59 trillion in the United States. The average student graduated in 2021 with roughly $39,351 in student loan debt.
If you have to repay tens of thousands of dollars in the years to come, wouldnt it be nice to earn rewards along the way? Getting 1% back would help put some money back in your pocket.
Don’t Miss: Capital One Credit Card Cash Advance Fee
Work With Your Creditors
If you’re looking at personal loans because you’re having trouble making your regular credit card payments, call your creditors and let them know what’s going on. Be honest about the issues, and ask them to work with you. They may lower your interest rate or forgive part of the debt.
It’s important to note that if your creditor lowers your interest rate or settles the debt for less than owed, the agreement is reported to the credit bureaus and impacts your credit score. Debt settlement of any kind can remain on your credit record for seven years. Still, if you’ve been late on payments or are making partial payments, your credit score has already been negatively impacted. It’s important to stop the bleeding and begin building stronger credit.
Pro tip: If your problem is not overspending, but poor credit, it is possible to get a personal loan with bad credit.
What Are The Potential Drawbacks Of Personal Loans
While your interest rate with a personal loan may be lower than your credit card rates, you may find that the monthly payment for your new loan cuts deeper into your monthly budget.
With a fixed-rate personal loan, youre locked into a set monthly payment for a specific period of time, and this monthly payment may be higher than the minimum payments on your credit cards, says Shannon McLay, founder of financial services company The Financial Gym.
So while you may save money on interest, your overall payments could be higher and present a cash flow issue. And as McLay notes, if you miss payments on your personal loan, it will most likely negatively affect your credit scores.
Another issue to look out for: Fees can add to the cost of your loan and eat into whatever you might be saving on interest.
Some lenders charge loan-origination fees for processing your new loan. Typically, the origination fee is a small percentage of the total loan. This fee may be included in the loan amount though which means youd be paying interest on the fee as well. Also, watch out for prepayment penalties, which are additional fees that lenders may charge for paying off your loan early.
Also Check: Capital One Credit Card Get Cash
Car Loan Versus Credit Card Debt
Does any of this help with your decision? Paying off either an auto loan or a credit card is a great feeling, but at what price? Auto loans often have early repayment fees and applying for personal loans to pay off credit card debt can lower your credit score. If you just look at the potential consequences, this decision is almost impossible to make.
Focus on the positive. Paying off the auto loan will give you outright ownership of your car. Eliminating high-interest credit card debt will put money back in your pocket. Which of these is more important to you? Bounce the choice off your loved ones and friends if youre having a hard time making the decision. There is no wrong answer here.
Paying Off Student Loans: The Pros And Cons Of Using A Credit Card
Paying off your student loans with a credit card comes with both risks and costs. Paying your student loans with a credit card is a possibility if you have private student loans, and it’s an approach that can grant you more repayment flexibility. Get the full picture before determining if this student loan repayment strategy is right for you.
Don’t Miss: Best Buy Credit Application Online
Should I Use A Personal Loan To Pay Off Credit Card Debt
Many or all of the products here are from our partners that pay us a commission. Its how we make money. But our editorial integrity ensures our experts opinions arent influenced by compensation. Terms may apply to offers listed on this page.
If getting out from under credit card debt feels impossible to you, you’re not alone. The average credit card interest rate in the U.S. hovers between 17% and 18%, and many card issuers charge more. Here, we’ll discuss when using a personal loan to pay off credit card debt makes sense, the pros and cons of using personal loans for debt consolidation, and alternatives to consider.
Balance Transfer Fees Are Common
Almost all balance transfer cards charge an upfront transfer fee its usually between 3% and 5% of the amount youre transferring. This fee could be well worth it if it helps you avoid a 20% credit card APR for a year or more, but its a reason to think twice before moving a lower-rate debt to a balance transfer card.
Recommended Reading: Td Bank Gift Card Balance
How To Choose A Balance Transfer Card
Balance transfer offers are out there, but finding cards that offer balance transfers can take a bit of legwork. You can visit Experian’s CreditMatch marketplace to see a list of balance transfer cards if you sign up for a free account, you’ll see personalized card offers based on your credit profile.
Here’s what goes into a typical balance transfer offer, using the Wells Fargo Active Cash Card as an example:
- The offer: 0% introductory APR for 15 months after account opening on purchases and qualifying balance transfers, then a 14.99% to 24.99% variable APR. Balance transfers made within 120 days qualify for the introductory rate and fee of 3%, then a balance transfer fee of up to 5% applies .
When Should I Use A Loan To Pay Off Credit Card Debt
Use a personal loan to pay off credit cards when the loan interest rate is lower than your credit card interest rate.
Let’s say you purchased a new roof for your home using a credit card. The credit card has an interest rate of 17%. With interest piling up, it feels like you’ll never pay it off. Then, you find out you can get a personal loan with an interest rate of 7.99%. You decide to get a loan, use the money from the loan to pay off your credit card, and then pay back the loan. You’ll pay less in interest this way.
That’s debt consolidation. Debt consolidation means taking out a personal loan to pay off your other debt. Then, you pay back the loan .
Here’s an illustration of how much time and money you could save by using a personal loan to consolidate your credit card debt.
Recommended Reading: How To Pay Best Buy Credit Card On App
Alternatives To Using A Credit Card For Your Mortgage
If you’re struggling to afford your mortgage payment, you may be eligible for various relief and assistance programs. You could try to:
- Contact your mortgage servicer before you miss a payment. Share that you’re struggling to afford your payments and whether you expect it to be a short- or long-term issue. The mortgage servicer might be able to temporarily offer a temporary repayment plan with a lower monthly payment or a mortgage modification if you experienced a significant hardship.
- Look into mortgage forbearance. The mortgage servicer may also discuss putting your mortgage into forbearance. Doing so could let you temporarily reduce or stop making your mortgage payments.
- Get help from a housing counselor. You can use the Consumer Financial Protection Bureau’s housing counselor tool or call the Homeowners HOPE Hotline. A housing counselor may be able to suggest different options you can use to stay in your home.
Mortgage lenders often don’t want to foreclose on a home and are willing to work with a borrower to avoid this outcome. There may be a cost to some of these programs or options, but they’re likely much cheaper than the fees and interest you’ll accrue if you start using your credit card to pay your mortgage every month.
What Is The Best Way To Pay Off Credit Card Debt
There will be a different answer for everyone here, but as a guiding principle, the best solution is the one that minimises the total interest you have to pay. Its also essential that your monthly payments are affordable, so you should work out upfront what you could afford, and stay comfortably within it.
Read Also: Best Buy Citibank App
Is Having Credit Card Debt A Bad Thing
Used well and responsibly, credit cards are a useful tool to help you budget and manage your finances.
But if youre not careful, they can cost you a lot of money in interest and cause you to spiral into large amounts of debt.
When you pay off in full what you owe on your cards every month, then youll get charged no interest.
But if you dont pay off the full amount, you pay interest on the remaining balance, which carries over to your next bill.
Most credit cards charge compound interest which really works against you when it comes to debt.
This means you not only pay interest on what youve spent and not paid back, but also on the interest youve accrued – and this can make credit card debt snowball. If the amount you owe continues to build, it can take years to pay it all off.
Debt on your cards can also damage your credit score – something that needs to be healthy if you want access to the best financial products on the market, like competitive mortgage deals.
High balances on your credit card accounts affect your credit utilisation ratio, which is an important factor in calculating your credit score.
This ratio looks at your credit card balance compared to your credit limit, as a percentage. The lower the ratio is, the better it is for your credit score. Experts advise keeping your balance under 30% of your total credit card limits to avoid damaging your credit score.
This is another good reason to aim to pay off as much of your card balances as you can every month.