Credit card debt in America has reached an all-time high!
Are you one of the millions of Americans who got carried away with using your credit cards?
You may have thought, “I don’t have to pay for that right away.”
Or maybe “I’ll just treat myself.”
Now you got yourself into a bind.
And you’re wondering how to pay off credit card debt!
Is it a good idea to get loans to pay off credit cards? Pay down the balance? Consolidate your debt?
If you’re drowning in high-interest rate credit card debt, it’s time to consider other avenues. When is it time to consider taking out a loan to pay off credit card debt? Read on to find out.
Is it Time to Take Out a Loan to Pay Off Credit Card Debt?
Taking out a personal loan to pay off credit card debt sounds like you’re just moving your debt from one place to another without solving your problem. Sometimes doing this makes sense. Let’s explore.
What is a Personal Loan?
Personal loans are unsecured, meaning that you don’t have to have collateral to get one. That being said, the interest rate on a personal loan can be a little bit higher than, say an auto loan, because there is nothing for the bank to repossess should you default on the loan.
Even with a higher interest rate, a personal loan will still have a lower interest rate than most credit cards, depending on your credit score.
When Does It Make Sense?
This approach makes sense only in certain cases.
Lower Interest Rate
When the interest rate on the personal loan is lower than the rate on your credit cards, you can consolidate your debt by paying it off with the loan.
A lower interest rate will free up some extra money to pay down the principal of the loan.
You’ll pay less interest overall especially because with a personal loan, you have a finite time in which to pay the loan back unlike a credit card.
With a credit card, interest keeps piling on any new purchase putting you further into debt.
If you have a few different credit cards with balances, you can consolidate everything into one payment by taking out a personal loan to pay off each credit card.
You will only have one loan on which to focus instead of various debts here and there.
This is successful if you keep yourself from using credit cards at least until the loan is repaid.
When Doesn’t It Make Sense?
Sometimes getting a personal loan will not help.
Monthly Payment is Higher
If your credit card debt is pretty high, the monthly payment on a loan might be higher than you can afford because of the shorter term of the loan.
Bad Credit, Higher Interest Rate
If you do not have excellent credit, the interest rate on a personal loan may be a bit higher. Coupling this with the shorter payback time, you again may not be able to afford the payments.
A Credit Counselor Can Be Your Friend
You’ve seen the good, the bad and the ugly about using a loan to pay off credit card debt. Do you know who can help you with your own personal situation? We can! Visit us at Bonsai Finance so we can take a look at your unique circumstances.