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People use personal loans for many different reasons—from buying an RV to paying off medical bills—but consolidating your credit card debt may be one of the most popular uses. By taking the proceeds of a personal loan to pay off credit card debt, you can eliminate multiple monthly high-interest card payments and consolidate the debt into one monthly personal loan payment—often at a reduced cost.
Credit Card Debt vs Personal Loan Debt
While credit card and personal loan debt are effectively the same—outstanding balances—one may be less costly. Credit cards typically charge interest rates between 12% and 24%, although some cards may charge rates higher than 30%. Personal loans, on the other hand, tend to have lower rates, ranging from 3% to 30%. With that being said, high-interest credit card debt typically costs you more in interest over time than personal loan debt, which is why you may consider using a personal loan to pay off your credit card debt.
4 Benefits to Using a Personal Loan to Pay Off Credit Card Debt
If your goal is to get out of debt faster than you’d be able to by simply making the monthly minimum credit card payments, applying for a personal loan could be helpful. But a personal loan offers other benefits, as well.
1. You May Earn a Lower Interest Rate
You could pay 20% APR or more if you carry a credit card balance, although borrowers with excellent credit could pay roughly 12% to 17%, depending on the type of card they own.
Personal loans, on the other hand, charge an average interest rate of less than 10%. The best personal loans are even cheaper than that if you have a high credit score. That means you could cut your total interest payment in half and even pay off your debt sooner since you’ll be paying less in interest.
2. Consolidation Streamlines Payments
If you make many different credit card payments every month, it could be difficult to keep track of all the due dates and minimum amounts owed. If you miss a payment or don’t pay at least the amount due, you could face late payment fees and your credit score could drop.
By taking out a personal loan to consolidate your credit card payments, you’ll make one monthly payment to your loan rather than many payments. Reducing the number of payments can free up time and space for other responsibilities.
3. You Could Boost Your Credit Score
Taking out a personal loan increases your credit mix, which makes up 10% of your score. It shows creditors and lenders that you’re responsible with money by carrying many different types of credit and debt.
You’ll also lower your credit utilization by paying down your debt. Your credit utilization is the ratio of how much credit you’re using vs. how much credit is available to you. If you pay off your credit cards, your utilization will go down to 0%. Under 30%—and ideally under 10%—is considered great credit utilization and can help you improve your score.
4. You May Pay Off Debt Sooner
If you’re only making minimum credit card payments every month, it could take you years or even decades to pay off your balances, depending on how much you owe.
With a personal loan, you can pay off your credit card debt right away and set up a payment plan to repay your one personal loan. Terms vary based on how much you borrow and your lender. If you were on track to pay off your credit cards in 10 years, you could take out a personal loan and pay it off in less than five years. Just be sure you don’t restart the cycle by rebuilding credit card debt.
3 Drawbacks to Using a Personal Loan to Pay Off Credit Card Debt
There are some potentially negative consequences to consolidating credit card debt by taking out a personal loan, including the cost. Consider these drawbacks, as well, before making a decision.
1. Taking Out a Personal Loan Could Lead to More Debt
A personal loan means you’re borrowing more money. If you take out a personal loan to pay off your credit cards and start to carry a balance on those credit cards again, you’re racking up more debt than you had before.
A personal loan for credit card consolidation isn’t a debt eliminator; use it only if you’ve gone through other options, like increasing credit card payments every month or opening a balance transfer credit card.
2. You’re Not Guaranteed a Lower Interest Rate
Personal loans tend to offer lower interest rates compared to credit cards, but that might not be the case for everyone. If you don’t have stellar credit, you might not qualify for a personal loan. If you qualify for a personal loan with bad credit, your interest rate may not be any lower—and could be higher—than what you’re paying now.
3. Personal Loans Have Fees, Too
Some lenders charge many different fees, like a late payment fee, origination fee and insufficient funds fee, for example. Be mindful of this as you’re comparing personal loan lenders.
How to Choose the Best Personal Loan
There are many different personal loan lenders that charge different interest rates and fees and offer various repayment terms. There’s no one set of standards that personal loans follow, which means you could see a wide range of offers based on what you qualify for. When exploring personal loan options, consider:
- Interest rates. The best personal loans will offer the lowest interest rates to those with the highest credit scores. The higher your credit score, the lower your monthly payment will be and the less interest you’ll owe over the life of your loan.
- Terms. Your repayment terms also vary greatly depending on the lender. Some offer repayment terms as short as six months while some are upwards of five to seven years. If you want to pay off your loan sooner, find a lender that offers shorter repayment terms. If you need to keep your monthly payments lower, see if you can find a lender with longer repayment terms.
- Fees. The better your credit score, the more loans you can qualify for that don’t charge origination fees or other charges. If you don’t have great credit, evaluate each lender’s fees and see which ones you’re comfortable with in case you have to pay them. For instance, if you miss a payment, is the late fee $15 or $30?
- Loan amount. Some people don’t need to borrow a lot to pay off their debt, while others need to take out a substantial amount. Each lender offers different minimum and maximum amounts. Along with that, your credit score could impact how much you’re allowed to borrow. The higher your credit score, the more trustworthy you look to lenders, allowing you to borrow more.
Alternative Option: Balance Transfer Credit Card
You may be able to apply for a new credit card that allows you to transfer balances from existing credit cards, perhaps as a lower interest cost to you. The benefits of a credit card balance transfer include:
- Interest-free payments. If you qualify for a 0% APR balance transfer, you won’t pay any extra interest charges for the promotional period, which would allow you to pay down your balance more cheaply.
- No balance transfer fee. Most credit cards charge a fee when you transfer a balance, but you can find a few that waive the balance transfer fee.
- New perks. If you have decent credit, you might qualify for a new card that offers cash back, travel perks or other types of deals for cardholders.
The drawbacks of a credit card balance transfer include:
- Eventual interest charges. If you don’t pay off the balance by the end of the promotional period, you could face interest charges on the remaining balance.
- Loss of promotional offer. Even though interest isn’t accruing, you’re still responsible for making minimum payments every month. If you don’t, you could lose your promotional offer and interest will start to add up on your entire balance.
- Missing out on qualification requirements. If you don’t have decent credit, you may not qualify for a new credit card line.
- Not having a high enough credit limit. Even if you do qualify, your entire balance might not transfer over because the card issuer offers you a lower credit limit than you need. This means you’re on the hook for the balance on your new card and any old cards that carry the remaining balances.
Debt Snowball or Avalanche
You may also decide the best way for you to tackle your credit card debt is by focusing extra payments on one of your cards. There are two primary ways people go about this: either the debt snowball or debt avalanche method.
The benefits of using one of these methods include:
- Avoiding new credit lines. If you don’t have great credit or don’t want to take on additional debt, these methods let you focus on paying down your debt with what you have, not adding to your burden.
- Focusing on high interest. With the debt avalanche method, you pay off your debt with the highest interest rate first. This could save you more in the long run.
- Focusing on little wins. The debt snowball method focuses on paying off the debt with the lowest balance first. If you need a quick win, this might be your best bet.
Of course, these payoff methods also have their drawbacks. You may find:
- It’s a slow process. Increasing your payments with only the cash you have on hand right now means you may pay off your debt slower compared to a personal loan.
- Your budget doesn’t work with it. If your budget is already stretched thin as it is, you may not have any extra money to put toward higher credit card payments.
How to Consolidate Credit Card Debt Without Hurting Your Credit?
Consolidating credit card debt has an initial temporary negative impact on your credit score. When you apply for a new credit account to consolidate your debt, like a personal loan, your lender typically runs a hard credit check, resulting in a hard inquiry. Hard inquiries drop your credit score by up to five points. While these inquiries stay on your credit report for two years, they only impact your score for one year.
However, you can take steps to combat this temporary drop and boost your credit score over time. For example, if this is your first time applying for a personal loan, it will improve your credit mix, which makes up 10% of your FICO score. Once you open a debt consolidation loan, you can boost your score by making on-time or early payments—your payment history makes up 35% of your FICO score.
So while you’ll most likely experience an initial temporary drop in your credit score when consolidating your credit card debt, you can rebound your score by following responsible credit practices.
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Frequently Asked Questions (FAQs)
How much credit card debt is normal?
On average, Americans carry $5,525 in credit card debt, according to a 2021 Experian report. However, regardless of the average credit card debt in America, it’s crucial to minimize your credit card debt as much as possible. We recommend keeping your credit card balances below 30% of your total available credit.
What happens to your credit card debt when you die?
Any unpaid debt after you die must be repaid, typically through assets from your estate, before any assets are distributed to your family members. If your debt exceeds your assets, the debt repayment method depends on several factors. For example, anyone who is a joint account holder on your credit cards may be subject to debt repayment after you die.
What happens to unpaid credit card debt after seven years?
Although unpaid credit card debt after seven years isn’t forgiven, it does fall off your credit report and will no longer impact your credit score. However, you may still be sued for your unpaid debts, regardless of whether it’s on your credit report or not.
How do you avoid credit card debt?
The best way to avoid credit card debt is to repay your balance in full every month. You can achieve this by limiting the number of cards you use, setting a budget, spending within your means, and enrolling in autopay so you never miss a payment.