If you have credit card debt, you’re not alone. According to Debt.org, the average American household has $8,398 in credit card debt. That’s a huge financial burden to pay off month after month after month. It’s no wonder then that a commonly asked question is should I get a personal loan to pay off credit card debt?
While it might seem like a no brainer to get a personal loan to pay off credit card debt, there are things you have to take into consideration before doing so.
Let’s take a look at some of the Advantages and Disadvantages of taking out a personal loan for your credit cards and figure out if you should.
- 5 advantages of paying off credit cards with a personal loan
- 5 disadvantages of paying off credit cards with a personal loan
- What you should consider instead
- Final thoughts
5 advantages of paying off credit cards with a personal loan
1. You might lower your monthly payments
This is one of the biggest reasons why so many people take out a personal loan to help reduce monthly payments. Instead of juggling multiple minimum payments between different credit cards, having one single payment is much lower and manageable. So this would definitely leave more money in your budget to do other things.
2. You might lower your interest rate
Naturally, credit cards typically have a much higher interest rate compared to personal loans. Credit card interest rates can get as high as 30%, whereas, personal loans can have an interest rate as low as 9%. This all, of course, depends on your credit score. The better your score, the lower your interest rate would be.
3. Having a single payment instead of multiple payments
By consolidating all your credit cards into one simple payment, you can bet it’s much easier to keep track of. It’s easy to forget a credit card payment when you’re juggling several. If you have a single personal loan payment, it’s much less of a headache to remember the payment dates and amounts.
4. You might improve your credit score
Since one of the metrics when calculating your credit score is your credit card balance, by paying off all your cards with your personal loan, your credit card utilization will turn into 0%! That’s a sure fire way to have your credit score shoot through the roof!
5. You might shorten your repayment period
The icing on the cake is that, with a personal loan, your repayment term might be between 24 to 60 months. This is because a personal loan has a set amount of time until the balance has to be paid off. Whereas, if you make minimum payments on credit cards, that balance may remain there for decades, making repayment a much longer battle. A personal loan could speed up your repayment time!
5 disadvantages of paying off credit cards with a personal loan
1. You might have a less flexible repayment plan
The first down side to using a personal loan is that you lose flexibility when paying back the loan. Credit cards have minimum payments on them and you can drag out a balance for much longer, whereas, a personal loan has a shorter repayment period and a set amount that you HAVE to pay no matter what.
2. You might get into more debt
When you use a personal loan to clear your credit card debt, your credit cards now all have a $0 balance. And guess how tempting it would be to start spending on those credit cards again? I’d suggest that you just cut up your credit cards after paying them off so that you’re not tempted to rack up more debt.
3. You might pay origination fees
When you open a new personal loan, some lenders might actually charge you an origination fee to your loan. This amount is dependent on how much you apply for. So the higher the loan, the higher your fees might be. So it’s important to make sure if the lender has origination fees when giving out personal loans.
4. You might not qualify
Just like any kind of debt, the borrower (you) should qualify for the loan. The bad thing about not qualifying for the loan is that your credit score might get a hard credit pull for nothing. So before applying for any loan, make sure you understand the requirements first and that you would qualify for the loan
5. You might get a higher interest rate
Since a loan interest rate depends on your credit score, the lower your score, the higher the interest rate. Yes, credit cards have a very high interest rate in general, but if you don’t do your math right, your personal loan might end up costing you a lot more. A higher monthly payment, higher interest rate, and a shorter repayment term can all add up.
What you should consider instead
Alright, so just so you know, a personal loan isn’t your only option when dealing with mounting credit card debt. While a personal loan has it’s advantages, it can also be a bad financial move, depending on your situation.
If you can’t get a personal loan, or if you fall under the disadvantages listed, you might consider these other options
Utilizing a balance transfer credit card
Instead of taking out a new personal loan, you could instead open a new credit card that has an introductory interest rate and balance transfer option. That way, you can transfer the balances of your credit cards to this new card, and enjoy a 0% interest during the introductory period.
Negotiate your debt
Depending on your situation, you might be facing financial hardships. You can always get on the phone and call your lender. You could negotiate your interest rate or monthly payments, thus reducing your debt burden. The good thing is, there’s nothing to lose!
Increase your monthly payments
This is easier said than done for many, but it’s definitely doable. By increasing your monthly payments using the Debt Snowball, you can work on paying down your debt at a much faster rate. This would save you so much interest over time.
This article was extensive but shows all the advantages and disadvantages of taking out a personal loan to pay off credit card debt. There is nothing inherently wrong with using this method, but it does come with some important disadvantages and factors to take into serious consideration.
The most important thing to remember, if you do decide to go about this route, is to make sure that you don’t go and rack up more debt when the credit card balances are back down to zero. That creates a huge problem and makes becoming debt-free that much harder.
Have you ever consolidated your credit cards into a personal loan? If so, let me know how that’s gone for you in the comments 🙂
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