So, if you’ve racked up a bunch of credit card debt and feel buried in payments, know that you are not alone at all! Even if you make a few extra payments, interest charges still add up. You might even feel your efforts aren’t getting you anywhere.
One option you might consider is taking out a personal loan to pay off credit cards. Sure, you might not feel good about taking out another loan when you already have a lot of debt. But there are some benefits that can make it worth it to use a personal loan to pay off credit card debt.
Read on to learn about personal loans and when they might make sense for your credit card debt situation.
How Personal Loans Work
When people use personal loans to pay off credit cards, that means they’re taking on a new bank loan with a fixed interest rate and term. You can usually borrow anywhere between $100 and $5,000, although these limits can vary by bank. You can expect your loan term to be from one to five years in most cases.
After receiving your personal loan funds, you’re free to write checks or perform money transfers to pay off your credit cards. You’ll then pay the fixed payment for your personal loan rather than have to make the individual payments to your credit cards.
Getting a New Interest Rate
One big benefit of using a personal loan to pay off credit card debt is you might save in interest charges over time. If your credit card has a 23% interest rate and your bank offers a personal loan with a 10% interest rate, it can make sense to use this option.
However, it really pays to shop around for a low-interest rate for your personal loan since you can find rates as high as 36%.
It wouldn’t make much sense to use a personal loan to pay off your credit card debt if the interest for the personal loan is higher than for your credit cards. But if you can find a good rate on a personal loan, you can come out ahead, especially if your credit card has a variable interest rate that tends to go up.
Having a Fixed Monthly Payment
Another selling point is that choosing to use a personal loan to pay off credit cards consolidates your monthly payments. This is more convenient for you than keeping track of multiple card payments and due dates.
Also, your payment will be a fixed amount – possibly less than you pay now if you save in interest charges and fees. You’ll always know what you need to pay each month. Budgeting for your debt payments becomes easier.
Paying off Your Debt Sooner
With a set loan term, interest rate, and fixed payments, you can pay off your credit card debt sooner with a personal loan.
Depending on your budget, you might choose a short personal loan term. This allows you to pay off your credit card debt within a few years rather than the many years it can take with minimum credit card payments.
If you strive to live a debt-free life, taking out a personal loan to pay off credit card debt can help you get there faster if you’re willing to pay more per month in the short term.
Improving Your Credit Score
It might seem surprising, but taking out a new personal loan to pay off credit cards can help your credit. This is partly due to how the credit bureaus look at installment loans like personal loans more favorably than credit card debt.
When you pay off your credit cards with a personal loan, your credit score can benefit from lower credit utilization on the cards and an improved mix of accounts. However, you might see a credit score hit in the short term due to applying for and taking out a new line of credit.
If you’re curious how a new line of credit will affect your credit score, try using an online credit score simulator like those offered through the credit bureaus.
Considering Other Debt Repayment Options
So, you’ve seen the benefits of using a personal loan to pay off credit cards. But you should also know there are other options out there you should consider.
If your goal is to pay off your credit card debt quickly, consider paying as much extra a month as possible to reduce your balances. Also, focus on paying off the cards with the highest interest rates first rather than dedicating additional funds to all your cards at once. You can always come back later and pay off the cards with the lowest rates.
Another option is to take out a new credit card with a balance transfer offer. Depending on the bank, you might find cards that waive balance transfer fees and charge no interest for up to 18 months. If you qualify for a large enough credit line, you can save a lot in interest over that period and possibly get your debt paid off too.
So, Should You Use a Personal Loan to Pay off Credit Cards?
You’ve got the facts about using a personal loan to pay off credit cards. So, now you should consider your personal credit situation and your financial goals.
In the end, you’ll want to find out if this option helps you save money in the end. If you won’t get a better deal with interest rates, then you might be better off continuing to pay off your credit cards yourself and make some extra payments when possible.
If you want a single steady payment with a set term to pay off debt sooner, then the convenience of using a personal loan to pay off your credit card can also be worth it.
Be sure to check out our blog for more advice about personal loans and credit!