Updated on Thursday, December 17, 2020
Credit card debt can be an expensive burden on your finances. With high interest rates and indeterminate minimum payments, it can seem like youâ€™re just throwing money at your credit cards every month without making a dent in your debt.
Make a plan to pay off your credit card balances in full with a credit card debt consolidation loan, which is a type of personal loan. Using a personal loan to pay off credit card debt helps you repay all your debts in one monthly payment on a set time frame, and it can save you money on interest over time.
Personal loans are lump-sum loans that are repaid in fixed monthly installments. They have a fixed APR, meaning your interest rate will stay the same throughout the life of the loan. Using a personal loan to pay off multiple credit cards can save you money on interest and get all your monthly payments in one place.
Consider the benefits and drawbacks of using a personal loan to pay off your credit cards:
When youâ€™re trying to keep track of too many cards, itâ€™s easy to confuse payment deadlines or accidentally miss them altogether. Paying off multiple credit cards with a personal loan consolidates that debt into one monthly payment, meaning fewer bills to worry about.
You may be able to secure a lower APR on your personal loan than you were paying on your credit cards. Your interest rate is determined by factors including credit score, debt-to-income ratio, employment status and credit history.
Every lender has different borrowing criteria, but generally speaking, a high credit score and a low debt-to-income ratio will help you get a more competitive interest rate.
If youâ€™re able to secure a lower interest rate on your personal loan, it will likely reduce the amount on your monthly payments. This will allow you to enjoy a little extra room in your budget.
If youâ€™re making the minimum payment on a substantial credit card balance, you could be stuck with the debt for decades. On the other hand, most debt consolidation loans have a term of 12 to 60 months. This can allow you to pay off the debt on a set timeline.
If much of your credit portfolio is consumed by revolving accounts, diversifying the mix by taking on a personal loan can improve your credit score. Making monthly payments on a timely basis showcases your ability to manage debt responsibly. The increase will take time and wonâ€™t be monumental, but itâ€™s a step in the right direction.
Lenders donâ€™t issue personal loans to just anyone. Since personal loans are unsecured, youâ€™ll need a proven credit history to qualify. Lenders consider your credit score as well as your debt-to-income ratio, which is the amount of debt you have compared with your annual income.
Personal loan interest rates are largely based on your credit score. Itâ€™s possible your credit card interest rate will be lower than the rate youâ€™re offered for a personal loan. In this case, it wouldnâ€™t make sense to proceed with debt consolidation.
Credit cards offer more repayment flexibility than personal loans, since youâ€™re able to make a minimum monthly payment. Personal loans are attached to a set repayment period â€” so although you may pay off your debt faster, the monthly payments may be higher.
If you donâ€™t have a lot of extra room in your budget, this could be difficult to handle. The last thing you want is to default on the personal loan that was supposed to be getting you out of debt.
Some lenders charge an origination fee, which is tacked on to your personal loan. In most cases, the fee costs 1% to 8% of the total loan amount. Your origination fee is accounted for in your APR, so itâ€™s a good way of measuring the total cost of the loan.
Paying off your credit card balances with a personal loan frees up space to start racking up charges again. If you donâ€™t completely trust yourself to cut ties with the plastic, it might not be wise to put the temptation out there. After all, debt consolidation is supposed to help improve your finances, not make them worse.
In many cases, using a personal loan to pay off credit card balances is a wise move, but not always. Ask yourself these questions to make sure this is the right choice for your unique situation:
Paying off your credit card debt can seem daunting, but a personal loan gives you the power to repay this debt on a set timeline. Depending on your unique situation, a personal loan can save you money in the long run and regain control of your finances.
Using a personal loan to pay off credit card debt is simple, since personal loans are issued in a lump sum directly to your bank account. You can then use that money to pay off your credit card balances in full.
Personal loans are offered by many online lenders, traditional banks and credit unions. To get the lowest possible APR on a personal loan for your financial situation, you should shop around and compare your options.
Many personal loan lenders let you prequalify, which estimates your APR with a soft credit inquiry. Prequalification will not affect your credit, so you can shop around for a personal loan without lowering your credit score.
When comparison shopping for a personal loan, take these factors into account:
Taking out a personal loan may not be the best way to pay off credit card debt for your financial situation. If you donâ€™t qualify for a personal loan or are unable to find one that meets your needs, here are a few other options to consider.
A balance transfer allows you to shift your debt from a high-interest credit card to one with a more competitive rate if you qualify. Many credit card companies even offer a 0% introductory APR, making it possible for you to pay less interest or none at all for a period of time, so you can pay your balance down faster.
MagnifyMoneyâ€™s balance transfer card marketplace lets you comparison shop to find the right credit card for your needs.
Homeowners may be able to pay off credit card debt at a lower interest rate using a home equity loan or HELOC, which allows you to borrow against the equity in your home. Equity is the difference between what the home is worth and the outstanding debt on it.
For example, if your property is valued at $400,000 and you owe $250,000 on your mortgage, you have $150,000 in equity. Most lenders will allow you to borrow up to 85% of the current value of your home.
Tapping into home equity may allow you to pay off credit card debt at a lower interest rate, but since these loans are secured by your home, you risk losing the roof over your head if you default on the loan.
Getting a loan from a bank isnâ€™t always the best way to repay existing debt. You may be able to pay off credit card debt at little or no interest by borrowing from a friend or family member.
More than half of Americans have either borrowed from or loaned money to a loved one within the past year, according to a November 2020 LendingTree survey. Unfortunately, more than a third experienced negative consequences from the transaction. If you take this route, set firm expectations upfront and openly discuss the loan amount and interest rate.