Should I use a Personal Loan to Pay off Credit Card Debt is a post originally published on: Everything Finance - Everything Finance - Its all about Money!
If getting out of credit card debt has been a challenge for 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. Credit card debt numbers in the United States are enormous. Consumers have a total of $841 billion on their credit cards, and the average American credit card debt is $5,221. Have you ever considered a personal loan to pay off credit card debt?
If you have one or more high-interest credit cards and are looking for ways to ease your mind, you could consider taking out a personal loan to simplify and consolidate your debt. This article will take you through the process of paying off your credit card debt using a personal loan, the pros, and cons of using personal loans for debt consolidation, and alternatives to consider.
When Does Debt Consolidation Make the Most Sense
Everyone’s financial situation is unique, so it’s important to carefully consider the benefits before making a decision. A personal loan makes the most sense when you can improve your debt situation in one or more of the following ways.
Lower Interest Rates
A personal loan might have a lower interest rate than your credit cards do. Depending on the length of your repayment term, it may help you save money on interest.
Interest rates continue to rise, and the rate you’ll get on a personal loan will depend on several factors including Federal Reserve monetary policy, inflation, the bond market, and others. Your credit score also influences your interest rate. Those with higher credit scores may be rewarded with lower rates.
It May Help You Lower Your Monthly Payments
Evaluate whether or not your monthly credit card payments are beyond your budget, if they are a personal loan can be used to lower them. This is done by structuring the loan so that you take longer to repay the debt. It’s important to keep in mind, however, that you’ll have to pay more in interest with longer loan terms in some cases.
Lower Interest Rate
If you use a personal loan to pay off your credit card debt, the interest rate you’ll pay is locked in when the loan is created. You won’t have to worry about any future rate increases.
Streamline Payments
If you pay off your credit card debt with a personal loan, you’ll have a fixed repayment schedule. With a credit card, you have the option of making a minimum required payment each month. This may not allow you to pay down your debt if you owe a lot.
With a fixed repayment schedule, you’ll pay the same amount each month. This makes budgeting easy, and it also ensures that you’ll be making steady progress toward paying off your debt.
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It Can Simplify Your Finances
If you have multiple credit cards, keeping up with the different due dates each month can be difficult. If you accidentally miss a payment, it could damage your credit score. By consolidating your credit card debt with a personal loan, you’ll only have one payment to keep up with each month.
It May Help You Get Out of Debt Faster
A problem with high-interest credit card debt is that it causes many to get trapped in cycles of debt that they have a hard time breaking free from. If your balance is high, making the minimum monthly payments can drag the repayment out seemingly forever. Late payment fees and high-interest rates can also cause the balance to grow instead of decrease.
With a personal loan, you’ll have a specific number of payments you’ll need to make. Each payment you make brings you one step closer to eliminating debt.
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It May Boost Your Credit Score
The on-time monthly payments you make on a personal loan will be reported to the three credit bureaus (Experian, Equifax, and TransUnion). Make your payments on time and this will continue to improve your credit score.
Using a personal loan to pay off credit card debt can also help your credit score is by decreasing the amount of available credit you have. This is one of several factors that influence your credit score, and it’s known as the credit utilization ratio.
The amount of personal loan debt you have, however, is not factored into your credit score. Transferring debt from your credit cards to a personal loan, therefore, will quickly lower the amount of available credit you are using, which will benefit your score.
Pitfalls To Avoid in Taking out a Personal Loan
Taking out a personal loan to pay off credit card debt isn’t without a few pitfalls. Here’s what you need to know about potential problems that could arise when you use a personal loan to pay off credit cards.
Adding More Debt
What you’re doing when you take out a personal loan to pay off credit card debt is essentially taking on additional debt. If you aren’t careful and start spending on your cards again, you could find yourself with credit card debt and a personal loan to pay off.
Excessive Fees
Applying for and paying off a personal loan can be expensive in terms of fees. As you compare different lenders, make sure you ask about prepayment penalties, origination fees, and late payment fees. If you cannot cover the cost of these, you could find yourself spending more than you hoped to get rid of your credit card debt.
Higher Than Expected Interest Rates
While credit cards have higher interest rates, there’s no guarantee that you’ll get a lower interest rate with a personal loan. For example, if you have poor credit, you may not qualify for the best rates for personal loans.
Should I use a Personal Loan to Pay off Credit Card Debt is a post originally published on: Everything Finance - Everything Finance - Its all about Money!
