Should I Take Out a Personal Loan to Pay off Credit Card Debt?

 

The average credit card interest rate just hit 16.98 percent, with new offers coming in higher at 18.89 percent. Coupled with inflation and soaring gas prices, these interest rates are beginning to push budgets to their limit. 

But that’s just the beginning. Now that the Federal Reserve has announced its highest rate increase in three decades, there are widespread fears that APRs are only going to go higher.

This has led many to ask the question: Should I take out a personal loan to pay off credit card debt?

Similar to credit cards, the interest rate on a personal loan is dependent on your credit score, credit history, and trustworthiness to lenders. 

Yet, the average APR for personal loans is much lower at 9.41 percent.

Sounds like a great deal, right?

Mathematically speaking, a personal loan is an excellent option to pay off credit card debt, but it isn’t the only option. Remember, personal finance is, well, personal. This means that there are a lot of factors to consider before deciding whether a personal loan is right for you.

Is It Worth It To Get a Personal Loan to Pay Off Debt?

If your credit card debt has spiraled out of control, you have plenty of options to regain control of the situation. 

One popular option is to take out a personal loan that has a lower interest rate than your credit card. If you have multiple credit cards, you can also take out what is known as a debt consolidation loan – or a personal loan that covers all of your separate credit card debts. This makes repayment much more manageable and can save you money in the long run!

Here are some benefits of taking out a personal loan for credit card debt:

• You can pay off your credit card debt in full. Keep in mind that this is not the same thing as becoming debt-free. However, because personal loans can have substantially lower interest rates, this can save you money in the long run! You might even find that your credit score improves as a result of eliminating your revolving debt (personal loans, on the other hand, are considered installment debt).
• You will only have one monthly payment instead of multiple. Did you know that the average American has 4 credit cards? If you’re struggling to pay off debt on multiple cards, getting a personal consolidation loan will make it easier to manage your debt. For example, now you only have 1 payment to focus on. It’s not uncommon for people with multiple cards to accidentally miss payments simply because keeping track of that many accounts is an organizational nightmare. A consolidation loan simplifies everything.
• You will likely have a lower APR. While the exact rate you get is dependent on your credit score, it’s likely that any personal loan you receive will have a lower interest rate compared to your credit cards. Let’s say you have $10,000 in credit card debt with an APR of 16.98 percent. By getting a personal loan with an interest rate of 9.41 percent, you’d save $3,740 over the course of two years!
• You can get a lower monthly payment. Most personal loans have repayment plans ranging from 12 months to 60 months. The longer the term of your loan, the lower your monthly payment will be. This can be an excellent option if you are currently struggling with other expenses or with boosting your income. Keep in mind, however, that longer terms also mean higher costs in terms of interest, but the cost may be worth it if you need the cash flow now.
• You could boost your credit score. One of the biggest factors in your credit score is “credit utilization.” In other words, how much of your available credit are you using up, and what types of debt are part of your credit mix? By paying off your credit cards, the utilization of your revolving credit should drop to 0 percent. Anything under 30 percent is considered good, so dropping your utilization down to 0 should significantly boost your credit score.

These are all excellent reasons why you might want to consider a personal loan to pay off credit card debt.

Of course, there are two sides to every coin. 

What’s right for one person might not be right for you.

Are There Downsides to Getting a Personal Loan for Credit Card Debt?

Perhaps the biggest con to a personal loan is if your spending and budgeting habits don’t change, then your financial situation could get worse.

Consider this: At first, your budget and credit score will improve when you pay off your credit card debt with a personal loan.

But if your spending habits remain the same, eventually you’ll accrue credit card debt again. But now instead of just having credit card debt that you have to repay, you also have the personal loan as well. What was meant to help you is now part of a messy financial situation.

So before taking out a personal loan, it’s critical that you know how to budget, save, and understand finance 101.

Another factor to consider are the fees. Different banks charge different fees, but one of the most common ones are “loan origination fees.” If you have a small credit card balance, the savings in terms of interest rates might not be enough to justify the cost of the origination fee. 

Balance transfer fees are another cost (usually 3 to 5 percent of the balance amount) that can make debt consolidation more expensive than simply paying off your credit card debt.

How Can I Get a Personal Loan for My Credit Cards?

If you think that a personal loan is right for your situation after reviewing the pros and cons, here are the exact steps you should take to protect yourself and your finances.

• Check your credit report. You shouldn’t have to pay for this service. Most major credit card companies will allow you to do this for free on their platforms. You can also visit https://www.usa.gov/credit-reports for a list of comprehensive, free ways to make sure that your credit report is accurate. Be sure to correct any errors and to be on the lookout for potential identity theft.
  
• Determine how much you need to borrow. Before taking out a loan, it’s important to know exactly how much you need. Make a list of all your credit card accounts, compile them, and add up the amount that you owe.
• Research the lender with the most favorable terms. Most lenders do what is referred to as a “soft” credit check, which shouldn’t impact your credit score. This will allow you to see what interest rates you qualify for. Remember to ask about any fees or “hidden costs” such as loan origination fees, balance transfer fees, etc.
• Gather documentation and apply. When you’re ready to apply, the lender will do a “hard” credit check. This will result in a temporary ding to your credit, but as you repay the loan, you can be confident that your credit score will improve. Remember to have your I.D., pay stubs, tax returns, and credit card statements ready for the application process!
• Begin making payments. Once you’re approved and your credit card debt is paid off, you can begin making payments on your personal loan! Be sure to stick to the terms of the agreement to ensure that your credit score improves over time.

Again, the key to making this work is to commit to healthy budgeting, saving, and spending habits. 

If you haven’t already, I’d encourage you to view my previous budgeting posts. 

As someone who was once tens of thousands of dollars in debt, I can tell you first hand how terrifying and vulnerable it is to feel like you are trapped in financial quicksand. It’s an awful feeling, yet we always have the opportunity to better ourselves and plan for the future.

It might not seem like it now, but the actions you take today are the foundations of tomorrow.

So… what steps are you taking to get out of credit card debt?

If you’re new to my website, I’d encourage you to join the TBM Family on Facebook.

There are tons of people just like you who have walked in your shoes and have journeyed to greener financial pastures. I hope to see you there 🙂