If you have debt on your credit card, you know how annoying it can be to try to pay up more than one credit card payment every month. A lot of questions will keep coming to your head. Should you focus on repaying the card with the highest interest rate or the one with the highest balance? This is where paying off credit card debt with a personal loan comes in.
Using a personal loan to pay off credit card debt can help you solve lots of problems. You can easily make use of the personal loan to repay the card bill. And since personal loans do come with very low interest rates than credit cards, you may even be able to save money on interest charges.
Although paying off credit card debt with a personal loan is a very good option, there are many things you need to consider. Read this article to the very end to know when it is the right time to use a personal loan to pay off your credit card bill and when it is not.
When to Use a Personal Loan for Credit Card Debt
Just so you know, this process is referred to as debt consolidation. And it involves taking out a personal loan to pay off multiple credit card debts. While it may seem like swapping one debt for another, this approach can provide you with several benefits, especially if you secure a loan with favorable interest rates and terms.
• If you qualify for a personal loan with lower interest rates
If you qualify for a personal loan with a good interest rate, you could save money compared to your current credit card APRs. Personal loan rates average around 12.38% (as of August 2024), which is significantly lower than the average credit card rate of 20.73%. Even if your credit score isn’t perfect, you could still get a rate that saves you money.
• Simplified payments
Managing multiple credit card payments can be quite stressful because of the different due dates and interest rates. A personal loan lets you combine all your debts into one monthly payment, making it easier to stay organized. Plus, with a potentially lower APR, you can start making real progress on paying off your debt.
• Lower monthly payment
If your credit card payments are stretching your budget too thin, a personal loan could offer relief. By securing a loan with a lower interest rate and spreading payments over a longer period, you might be able to reduce your monthly payment to something more manageable.
• A clear debt-free date
Credit cards can keep you in a cycle of debt, especially if you keep adding new charges. With a personal loan, you’ll have a fixed interest rate, a set monthly payment, and a clear repayment schedule. You’ll know exactly when you’ll be debt-free, which can provide peace of mind and help you stay on track.
If you’re struggling with credit card debt and want a more straightforward path to pay it off, consolidating with a personal loan might be the solution.
When Not to Use a Personal Loan for Credit Card Debt
While taking out a personal loan to pay off credit card debt can be a smart move, it’s not always the best option. Here are some situations where it is advisable to go for other options.
• Small, manageable debt
If you have a small amount of debt that you can pay off within a year or so, a balance-transfer credit card might be a better choice. Many of these cards offer 0% APR on transfers for about 21 months, giving you time to pay down your debt without accumulating interest. While there may be a transfer fee of 3% to 5%, the savings on interest could still be significant.
• Ongoing bad spending habits
If your credit card debt is the result of poor spending habits, consolidating your debt won’t solve the underlying issue. Before taking out a personal loan, consider addressing your spending behavior. You might benefit from working with a personal finance coach or adopting a budgeting method that helps you manage your finances better. Changing your habits is crucial to avoiding future debt.
• Overwhelming debt
If your debt feels unmanageable and you’re struggling to see a way out, a personal loan might not be enough. In such cases, you might consider working with a debt relief company or a non-profit Consumer Credit Counseling Service (CCCS).
They can help you explore options like debt management plans or even bankruptcy if necessary. Before committing to any service, make sure to research and verify their reputation through your state attorney general and local consumer protection agencies.
How to Get a Personal Loan to Pay Off Credit Card Debt
Using a personal loan to pay off high-interest credit card debt can be a smart move. The below is how you can easily go through the process:
- Check Your Credit Score: Start by reviewing your credit report to ensure there are no errors. Gather the necessary documents to prove your financial situation and identity before applying for a loan.
- Shop Around: Get prequalified with several lenders to compare your options. Look at the APR, monthly payments, loan term, and other features to find the best offer for your needs.
- Calculate Costs: Use a credit card calculator to see how much it will cost to pay off your current debt, including fees and interest. Then, use a personal loan calculator to see if the loan will actually save you money. Don’t switch debts if it’s going to cost you more in the long run.
- Apply for the Best Offer: After comparing your options, apply with the lender that offers the best deal. Be ready to provide any additional information they might need.
- Receive Funds and Repay: If approved, your lender will either send you the funds directly or pay off your credit card debt for you. Set up autopay to ensure you never miss a payment and avoid late fees.
Using a personal loan to pay off credit card debt can help you clear your balances and regain financial control. However, it’s not the only option. A balance transfer credit card is another effective way to consolidate debt into one payment.
Before committing to a loan, it is advisable that you explore all your options. Ensure the loan has a lower interest rate than your credit cards. And make a solid plan to repay the loan without falling back into credit card debt. This approach will help you effectively manage and eliminate your debt.
