If you have credit card debt, you know how stressful it can be trying to balance multiple credit card payments each month. Can you pay more than the minimum payment on each card? If so, how much more can you pay? Should you focus on paying off the card with the highest balance or the one with the highest interest rate?
Taking out a personal loan to pay off your credit card debt can solve many of these problems. You can use a personal loan to pay off your credit card debt in full. Interest rates on personal loans are usually lower than credit cards, so you may even save money on interest in the long run.
That said, there are pros and cons to using a personal loan to pay off credit card debt. Let’s review the pros and cons and explore some options that may help you pay off credit card debt without taking out a personal loan.
Why Use a Personal Loan for Credit Card Debt?
Paying off credit card debt with a personal loan is a form of debt consolidation, and there are many benefits to consolidating your debt into one monthly payment. Here are the three biggest reasons to take out a personal loan to pay off credit card debt.
Pay off your credit card debt in full
If you have a high credit card balance, taking out a personal loan can help you pay off your credit card debt in full. This measure not only gives you the peace of mind of being credit card debt-free, but it can also boost your credit score.
Remember that paying off credit card debt with a personal loan isn’t the same as being debt-free — you’ll still need to pay back the personal loan after you’ve paid off your credit cards — but paying off a high credit card balance and being free from the high interest payments that come with it can be a huge financial relief.
Low interest rates
The average interest rate on a credit card is currently around 20.76 percent APR, while the average interest rate on a personal loan is between 10.73 percent and 15.50 percent APR for people with good to excellent credit. It’s also important to keep in mind that many credit card interest rates are significantly higher than average.
While your actual interest rate will vary depending on your credit score, the amount you plan to borrow, and the terms of your loan, a personal loan’s APR is likely to be lower than a credit card, and most personal loans have a fixed interest rate, so using a personal loan to pay off your credit card debt can often save you a lot on interest.
Monthly lump sum payment
Balancing multiple credit card payments each month can be difficult. A personal loan allows you to consolidate your debts into one monthly payment. This process makes it easier to plan ahead and set money aside for your monthly loan payment, and it also helps you pay off your personal loan faster.
Remember: the more money you can put towards your monthly loan payment, the more you’ll save in interest payments in the long run.
Potential disadvantages of paying off your credit card with a personal loan
Paying off credit card debt with a personal loan has many advantages, but it also has some disadvantages, including the possibility of falling back into credit card debt. Here are the four biggest disadvantages of paying off credit cards with a personal loan.
A personal loan is still debt
While a personal loan can help you pay off your credit card debt in full, it’s important to remember that a personal loan is still a form of debt. The debt doesn’t go away when you’ve paid off your credit cards. You still need to pay back your personal loan and make monthly loan payments without incurring new credit card debt in the process.
It’s hard to avoid using credit cards
Learning how to spend within your means can be tricky if you’re in the habit of paying off credit cards for expenses you can’t pay off in full each month. If you use a personal loan to pay off credit card debt, it’s important to avoid running up new credit card balances while paying off your personal loan; otherwise, you could find yourself in a worse situation than you started out in.
If you use your credit card for small purchases and can pay them off in full each month, you may be able to continue using your credit card after you’ve paid off your personal loan. If not, it’s best to avoid using credit cards altogether. Once you’ve paid off your personal loan, you can start using your credit card again, but only for purchases that you can pay off in full at the end of each billing cycle.
Low interest rates are not guaranteed
We’ve mentioned many times that personal loans tend to have lower interest rates than credit cards, but this isn’t true for everyone. If you have a bad credit history and a low credit score, you may not be able to get a personal loan. And even if you are approved for a personal loan with bad credit, you may be charged a higher interest rate than you’d like.
Personal Loan Fees
Some personal loans will charge you a fee when you take out the loan, so keep this in mind when considering your options and find out if there are any other fees you may incur before taking out a personal loan.
How to pay off credit card debt with a personal loan
If you want to pay off your credit card debt with a personal loan, here are the steps you need to follow:
- aApply for a personal loan: Compare personal loan services, research the eligibility requirements, and apply for the loan that you think best suits your debt and credit score.
- Use the loan money to pay off your credit card debt. Loan servicing companies often deposit personal loan funds directly into your checking account. Use that money to pay off your credit card debt, not for anything else. If you misuse personal loan funds, you’ll have to pay back both your credit card debt and your personal loan.
- Pay off your personal loans as soon as possible. Once you’ve paid off your credit card debt in full, focus on paying off your personal loans as quickly as possible. Make sure you don’t get penalized for paying off your loans early, and put as much money towards your loan payments each month as you can afford.
- Avoid using credit cards while paying off a personal loan. While you’re paying off your personal loans, try not to get back into credit card debt. Avoid using your credit card and only buy things that you know you can pay off in full each month.
- Start using your credit card for things you can buy within your budget. There’s no reason to stop using credit cards forever. There are many benefits to using a credit card, such as earning points on purchases. That said, make sure you only use your credit card for purchases you can afford. Credit card debt is expensive, time-consuming, and more hassle than it’s worth. That’s why many people turn to personal loans to pay off their credit card debt and get a fresh start.
Alternative ways to manage credit card debt
Don’t want to use a personal loan to pay off your credit card debt? Here are some alternative options you can use to pay off your credit card debt.
Apply for a balance transfer credit card
A balance transfer credit card helps you consolidate your credit card balances onto one card, which can make it easier to pay off your credit card debt. Many of the best balance transfer credit cards offer a 0 percent introductory APR for 12 to 21 months, helping you pay off your balance while avoiding paying interest.
Interest rate reduction negotiations
If you think lowering your credit card interest rate could give you the edge you need to pay off your credit card debt faster, try contacting your lender and asking for a lower interest rate. Keep in mind that cardholders with good credit are more likely to qualify for lower interest rates than those with a history of missed or late payments.
Inquire about the needy assistance program
Credit card issuers have hardship programs to help people who have lost their jobs or are facing unexpected financial difficulties. Many of these programs include credit card grace periods, where the card issuer waives payments (and sometimes interest) for a period of time. If you’re in the middle of an economic crisis, calling your credit card issuer and asking about hardship programs can help prevent you from falling into unmanageable credit card debt.
Find out about credit counseling
A reputable credit counseling service can help you manage your credit card debt and suggest options that can help you pay off your debt faster. Whether you’re looking to create a budget or compare debt consolidation options, a credit counseling service can provide the guidance you need.
Sign up for a debt consolidation service
If you think paying off your credit card debt in full is impossible, debt consolidation services can help you negotiate a settlement with your credit card company. Debt consolidation companies often charge high fees, and consolidating without paying off your debt in full can lower your credit score. However, debt consolidation is one way to deal with credit card debt that you can no longer handle on your own, so it’s worth considering.
Conclusion
Taking out a personal loan to pay off credit card debt can help you pay off your credit card debt in full and get control of your finances. However, a personal loan isn’t the only option for people who want to pay off their credit card debt. For example, a balance transfer credit card is another good way to consolidate your credit card balances into one monthly payment.
Before taking out a loan, consider all your options. Make sure the interest rate on any personal loan you’re considering is lower than a credit card, and make a plan to pay off your personal loan without taking on new credit card debt. This is the best way to use a personal loan to pay off your outstanding credit card balance.
