You’ll not find too many instances where taking out more unsecured debt to pay off another unsecured debt like credit card bills makes sense. But if you use a personal loan to pay off your credit card debt, you might be saving more on the interest. The debt is still there, but the interest you are paying currently can be reduced.
Too much credit card debt often creates serious financial problems. In fact, owing more on credit card bills than what you can afford in a month is quite troublesome and a waste of money. That’s not all, your outstanding credit card bills would hurt your wallet as well as your credit scores.
Practically, you should always pay off the full credit card bills every month. But if you can’t afford to pay off this huge debt at once, there are still some smart ways to tackle your credit card dues.
Consolidating your credit card debt with a personal loan is one of the smartest ways you can ever find it. These are the two valid reasons:
1. It might be cheaper
Interest rates payable on credit cards are typically quite high. Credit cards which we normally use in general like American Express, Discover, MasterCard, Visa, etc. have interest rates to rise by well over 15%, even for consumers with a good credit score.
If you compare the interest rate of a personal loan with a credit card interest rate, you’ll find the earlier one is quite low and affordable. With a decent credit score, the lender may offer you a better interest rate compared to the market rate.
2. This is a guaranteed option to improve your credit score
Personal loans are also treated as unsecured installment loans. They are quite different from revolving credit accounts like credit cards. So when you take out a personal loan, your credit score doesn’t get the negative impact in the same way as it would get when you incur credit card debt.
Practically, if you are paying off your multiple credit card bills with an installment loan like the personal loan, your credit utilization ratio will be zero, and your credit score will likely increase to a decent mark. But for that, you should keep yourself regular on your new personal loan.
Using a personal loan to consolidate credit cards
Taking out a personal loan to pay off credit cards is also called a credit card consolidation loan. The objective is to get a personal loan with a lower interest rate compared to the interest you are paying on your credit card. Apart from that, setting up a new, easy repayment period is also a motive.
For example, let’s say you have 5 credit cards and a total balance of $9,000. The interest rate is 18.00%. If you are taking out a three-year personal loan with a 12.00% APR, your monthly payment would be lower and the total interest over the life of the loan will also be affordable. In other words, you’d save a good amount of money by opting for a credit card consolidation loan.
Benefits of paying off credit card debt with a personal loan
1. You can lower your interest rates
Taking out a personal loan to consolidate your credit cards can lower the annual interest rate of your credit debts. Paying a lower interest rate may allow you to lower the cost of your debts, and pay off more principally each month, so that you may get out of debt faster.
2. You can get rid of your multiple monthly payments
You can consolidate multiple cards through one personal loan and reduce multiple payments per month. Once you start making only one loan payment, it’ll allow you to focus all of your time and resources on that one payment. It will be easier for you to pay off one loan instead of making multiple payments to several smaller credit cards.
Of course, you must also keep in mind that you should avoid making more credit card balances after consolidating your credit cards. Remember, you have an existing loan to pay off. If you still lose focus on your large debt and start accumulating new credit card debts again, I am afraid you’ll be falling into bigger debt problems soon.
Do you have a bad habit called overspending? Do you often exceed your monthly budget? You need to work on these aspects in order to get out of debt.
3. You can reduce your monthly payments
Using a personal loan to consolidate your debts can also lower your total monthly payments for the debts you owe. If you calculate the total amount you are paying each month as the minimum payment of your existing credit cards, you’ll notice that the monthly payment for your one personal loan will be much lower, compared to that amount.
Lowering your monthly payments can help you invest more money towards debt payments. Using a debt snowball method you can not only tackle your credit cards but can also manage your other debts easily and faster.
For example, if you pay $700 in total per month towards minimum payments to the credit cards, and now paying only $500 per month on your new personal loan, you can easily apply the extra $200 directly to pay off other debts. This strategy will help you get out of debt faster.
It is probably not a good idea to restructure your debts through a personal loan, either by cutting down your monthly payments or lowering your interest rate. Make moving your debt around worthwhile for you. Insist on a lower interest rate and a reduced monthly payment for your debt, so that you can pay off your debt faster and take back control over your finances.
If you need more help with your loan repayment process, consider seeking a consultation with a trusted financial expert.