Introduction
Credit card debt can turn into a financial burden for many people. The high-interest rates and endless minimum payments make it difficult to make progress on paying down balances. When your credit card debt overwhelms, you might consider consolidating it with your personal loan. But is this really a good strategy? Let’s take a look!
Is it advisable to pay off credit card debt with a personal loan?
The short answer is: it depends. If you have a high-interest credit card debt, a personal loan with a lower interest rate can be wise. [1]
A personal loan is an installment loan; that is, you borrow a fixed amount of money and repay it in equal monthly installments (EMIs) over a period of time. They typically have lower interest rates than credit cards, so consolidating your high-interest credit card balances into a personal loan with a lower rate can be a great strategy.
For example, you owe $10,000 on a credit card with a 19% interest rate. Your monthly interest charge would be around $158. If you consolidate this debt into a $10,000 personal loan with a 10% interest rate, your monthly interest cost drops to $100, saving you $58 each month. [2]
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Read Also: Why You Should Pay Credit Card Bills Early?
Analyzing the Pros and Cons of Personal Loans for Credit Card Debt
While using a personal loan to consolidate credit card debt can offer some benefits, there are also some potential drawbacks to consider:
Pros
- Lower interest rate saves money on interest charges
- Fixed monthly payments help establish a disciplined repayment schedule
- Opportunity to improve credit by paying installment loans on time
- Potentially faster path to becoming debt-free
Cons
- Closing credit cards can temporarily lower credit score
- Personal loans add another monthly payment
- If new charges are made, debt will increase again
- Loan origination fees can add to the total payoff cost
- Credit card rewards and benefits are lost
Read Also: Personal loan vs. Credit Card: What's better?
Comparing Personal Loan Offers
If you decide that debt consolidation with a personal loan is the right choice, comparing multiple loan offers is essential to finding the best rate and terms. Here are some key factors to consider as you evaluate lenders:
Interest rates – The APR is the primary factor determining how much the loan will cost in interest. Compare rates across multiple lenders.
Fees – Origination fees, application fees, and prepayment penalties vary greatly. Minimize fees to reduce the total cost.
Loan amount – Make sure the loan covers your credit card debt.
Term length – Longer terms mean lower payments but higher total interest. Find the right balance for your budget.
Prepayment policies – The flexibility to pay off the loan early with no penalty can save money on interest.
Eligibility – Compare qualification criteria like minimum credit score requirements across lenders.
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Read Also: The 6 Best Personal Loans of 2023 for Credit Card Debt
How Personal Loans Impact Your Credit Score
How Personal Loans Impact Your Credit Score
An important consideration when using a personal loan to consolidate credit card debt is the potential impact on your credit score. Here are some key ways a personal loan can affect your credit:
Credit inquiries – Applying for a personal loan will result in a hard inquiry on your credit report, which could cause a temporary drop in your score.
Lower credit utilization – Moving credit card balances to a loan lowers your overall utilization, which improves your score as long as you don't run up card balances again.
New account – A new installment loan will increase your report’s mix of credit types, which can positively influence your score.
Closed credit card accounts – Canceling old credit cards can lower your total available credit and the length of your credit history, negatively impacting your score.
On-time payments – Paying consistently on the installment loan will build your credit over time.
Read Also: What are some Credit Builder Loans That can Give Money Upfront?
Alternatives to Personal Loan: Balance Transfer Cards
While personal loans can be an effective debt payoff strategy, they are not the only option. Balance transfer credit cards allow you to consolidate your balances onto a new card with a 0% intro APR for a set period of time. [3] Bright Credit presents an innovative alternative worth considering. Here's how it can be a better choice:
1. Flexibility and Control: Bright Credit offers a revolving line of credit, allowing you to refinance multiple credit card debts up to your credit limit. You have the freedom to choose which cards to pay down and how much to pay each month above the minimum payment.
2. No Hidden Fees: With Bright Credit, there are no application, origination, late, or prepayment fees, making it a cost-effective option. The APR ranges from 9% to 24.99%, and the credit limit can be between $500 to $8,000.
4. Continuous Access to Credit: Bright Credit is not a one-time solution; it's a revolving line of credit. This means you can continue to use it as frequently as you like, even after paying it off once before, up to the credit limit.
5. Unsecured Line of Credit: Bright Credit is an unsecured line of credit, meaning it doesn’t require any security deposit, making it accessible to a broader range of people.
6. Interest Savings: If your credit card interest rates are high, paying them off with Bright Credit can save you on interest fees.
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Expert Tips: Make a Personal Loan Work for You
If you've weighed the pros and cons and decided a personal loan is the right debt payoff method for your situation, here are some expert tips to implement the strategy successfully:
Pick the lowest rate possible – Even a small rate difference can save hundreds over the loan term.
Automate payments – Set up autopay from your bank account to ensure reliable, on-time payments.
Pay extra when possible – Making additional principal payments reduces interest costs and pays the debt off faster.
Limit card use – Commit to not using the cards again until the loan is paid off to avoid increasing your debt.
Track your progress – Watching your balances go down motivates to stick to your payoff plan.
Consider balance transfers – Evaluate if consolidating onto a 0% balance transfer card would be more beneficial.
The Bottom Line
At the end of the day, utilizing a personal loan to consolidate and pay off credit card debt can be a smart financial move when:
- You have good credit and qualify for a low interest rate on the loan
- You have high-interest credit card debt you are struggling to pay down
- You need lower monthly payments to afford to pay off your balances
- You commit to not continuing to use your credit cards while paying off the loan
- You do a thorough cost-benefit analysis to ensure the interest savings outweigh any fees
However, personal loans have risks like temporary credit score drops and the potential to fall back into bad habits. Consider all your options, including balance transfers, and implement the debt consolidation plan responsibly.
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FAQs
1. Can I Consolidate All Types of Credit Card Debt with a Personal Loan?
Most personal loans can be used to consolidate various types of credit card debts. However, it's essential to confirm with the lender if there are any restrictions. Some loans may not cover debts from certain credit card companies or specific types of credit card charges.
2. Are there alternatives to using a personal loan to pay off credit card debt?
Yes, one alternative to using a personal loan to pay off credit card debt is a balance transfer credit card like Bright Money. These cards allow you to consolidate your balances onto a new card with a 0% intro APR for a set period of time, usually between 12-21 months. This allows all your payments to go toward paying down the principal balance rather than interest, which can help you pay off debt faster.
