If you’re quick to pull out your plastic to pay, you’re in good company. Total credit card debt among Americans is nearly $800 billion, according to Experian — and that’s up 6% from last year.
Credit cards can set up your finances for long-term consequences. Sure, low minimum payments are good for your budget, but with high-interest credit card debt, you may never catch up. However, there is a way to calm the storm. Getting a personal loan to pay off credit cards can help.
Quick navigation:
- Why you should pay off credit card debt with a personal loan
- Pros and cons of using a personal loan for credit card debt
- Other options for paying off credit card debt
- Is a personal loan going to help you manage credit card debt?
Why you should pay off credit card debt with a personal loan
It’d be nice to make a large payment to pay your credit cards off in full — never having to worry about debt again. But it’s not always a viable option when you have other major financial obligations. After rent or a mortgage payment, your car, insurance, and other bills, you may not have enough to cover extra payments towards your credit cards.
Getting a loan to pay off debt could get you a lower rate. This means the money you pay back won’t be as much as if you only made minimum credit card payments.
With one personal loan, you might be able to get out of debt on many different credit cards. This is also known as a credit card debt consolidation loan. Like student loan consolidation, you’re replacing many different loans with one easy-to-manage loan. It’s easier to make one loan payment than it is to keep track of many different loans. The same goes for credit cards.
If you keep a 20% credit card interest rate, and are paying $168 a month, you’ll pay $1,964.99 in interest and it’ll take you 42 months to get rid of your debt.
With a personal loan, you could save more than $900 in interest and pay off your debt six months sooner.
Pros and cons of using a personal loan for credit card debt
Using a personal loan to pay off a credit card can seem like an easy and simple solution, but it might not always be the best for you. Make sure you weigh your options before taking out a personal loan.
Pros
- Lower interest rate: In general, credit cards tend to have higher interest rates than personal loans. Getting a personal loan to replace your credit card debt with high interest rates will save you money.
- Convenience: The purpose of getting a personal loan is to pay off your credit cards — essentially credit card debt consolidation.
- Eliminate debt: Getting a loan to pay off credit cards is one step to eliminating your mounting debt.
Cons
- Must be creditworthy: Your interest rate depends on your creditworthiness. While there are loans available if you have fair or good credit, the interest rate isn’t guaranteed to be lower than what you pay on your credit cards unless you have good to excellent credit.
- Creates new debt: If you have a lot of credit card debt, the right loan (with the best rates and repayment term) may not cover all of your credit cards. You’ll be adding to your debt by getting another loan.
- Need to pay off full amount sooner: A personal loan will have repayment terms typically from three to five years — much shorter than a credit card you’re making minimum payments on. So, even though using a personal loan to pay off credit card debt will usually save you money in interest, keep in mind you’ll have to pay it back much sooner than you would a credit card.
Other options for paying off credit card debt
A personal loan is a good option to get rid of credit card debt, but it you may have other options available to you.
Balance transfer credit card
Instead of taking out a personal loan, consider a balance transfer credit card. Many credit cards offer an introductory 0% balance transfer. When you transfer your balance to a new credit card, you don’t pay interest for a promotional period. Essentially, you get a set amount of months interest-free.
Keep in mind that some offers have limitations on how much you can transfer and have a balance transfer fee. Your credit report and credit score will be checked, which could hinder your chances of getting approved.
Increase monthly payments
If you’re having trouble getting approved for a low-rate personal loan or balance transfer, you might not have any other options except paying off your credit cards the old-fashioned way.
If you have many different cards, try paying off the one with the lowest balance first, or the debt snowball method. Continue paying the minimum balances on the rest and putting any extra money you have towards card with the smallest balance. Once that is paid off, move to the next-highest balance until all cards are paid off.
You can also try paying the card with the highest interest first. Pay your minimum balance for every card, but for the highest interest, pay as much as you can every month until it’s gone. Continue this debt avalanche method until all your cards are paid off.
Is a personal loan going to help you manage credit card debt?
Having a personal loan to pay off your credit cards can work for many people, but it might not work for you. Remember to check out interest rates, fees (like an origination fee or prepayment penalty), monthly dues, and how long your loan will take to pay back. Not all personal loans have the same loan terms or loan amount, so pay attention to what the different financial institutions offer before signing up to get a personal loan.