Should you use personal loans to pay off credit card debt?

An average United States household has $37,172 in student loan debt and credit card debt of $6,662. Talk of scary combinations.

Regardless of the lower average balance, your credit card may pose a more significant threat to your financial situation than student loans. Between low minimum payments and skyrocketing interest rates, some borrowers have no end in sight. Therefore, if you’re neck-deep into credit card debt and are asking “are credit card consolidation loans a good idea?” you may find this information helpful.

Excessive credit card debt is arguably an indicator of serious financial problems. In fact, a credit card holder who owes more on their credit cards than they can afford to pay this month, then they are wasting their money and are already in trouble. Furthermore, the outstanding credit card debt hurting your wallet are equally impacting your credit score negatively.

Most consumers find it shocking that even the ‘on-time’ accounts can lead to poor credit scores. Arguably, earning great credit scores requires more than having a good payment history, which forms one piece of the larger puzzle. An outstanding credit card debt, regardless of whether you make all monthly payments before the due date.

Credit scoring models such as FICO are designed to make a comparison between your credit card debt balances and how much you qualify to spend (limits). The relationship between an individual’s credit card balance and limits may be referred to as the revolving utilization ration or debt-to-limit ratio. This ratio can be helpful when you’re looking for loans to help pay off debt.

Debt consolation is a strategy that aims at rolling multiple debts into one new one. The new debt ideally comes with a lower interest debt than the current debt. This makes payments more manageable and shortens the payoff period. The best loans to consolidate credit card debt include seeking an unsecured personal loan, a balance transfer credit card, a 401 (K) loan, and a home equity loan. The option you settle for depends on your debt load, available cash, credit history and score, and other your overall financial situation.

Using personal loans to consolidate credit card debt

It is possible to use a personal loan from an online lender, your local credit union or bank to consolidate debt. It is advisable that you begin with visiting your credit union to learn more about loans and credit cards. Most of these organizations provide their members with lower interest rates and flexible loan terms compared to online lenders, especially if the member has poor credit. Moreover, the unions charge a maximum percentage rate of 18 percent annually.

Typically, online lenders will allow you to apply for personal loans to consolidate credit cards without having an impact on your credit score. Additionally, a majority of these lenders offer interest rates on loans to consolidate credit cards without a hard inquiry on their customers’ credit, which is contrary to what many banks and credit unions. Notably, online lenders offer the lowest interest rates to borrowers with the best credit, with rates topping out at 36 percent. They never charge any fee to customers who pay their loans early. However, they may charge upfront registration fees ranging between 1–5 percent on loans. Some may additionally send the money directly to your specific creditors, which increases the odds of effective debt consolidation.

Pros and cons of debt consolidation loans

Personal loans to pay off bills have the most significant benefits if you are paying exorbitant rates in a variety of credit card accounts. Below are some of the reasons why you may consider low interest loans to pay off credit cards.

  • The potential for small interest loans – If you have a huge credit card debt, even a slight change in your current interest rate may lead to a big difference. Bear in mind that you’re not guaranteed of an interest rate that is lower on the personal loan. This will depend on your creditworthiness.
  • A single debt payment – Transferring debt from different credit cards to one consolidation loan may make your debt payoff simpler. For instance, you don’t need to worry about your previous loan payment amounts and dates. Additionally, making one payment can keep you organized and on track with your payments as opposed to several payments.
  • Quicker and more efficient debt payoff – Since you will have just a single debt payment each month alongside a fixed interest rate, it may take you a shorter period to pay off the amount due. This is especially because a credit card doesn’t have a stipulated repayment period. In fact, you may never get out of debt by just making the minimum payment.

Although there are several benefits associated with getting that personal loan to pay credit card debts, the move also comes with inherent risks. Before applying for personal consolidated loans, it is advisable that you research your options and gauge these demerits against the merits.

  • A potential for higher interest rates – Not every personal loan lenders will offer a low-interest rate. For instance, one company may offer interest rates that range from 9.95 to 35.99 percent APR. This is a massive range that will require you to have an excellent credit rating to enjoy the most favorable rates. Therefore, if the interest rate of your credit card stands at 18.00 percent APR and you are eligible for a personal loan with an interest rate of 25 percent, it’d better off the keep the credit card debt as it is.
  • You may be unable to afford it – In case you have a huge credit card balance, transferring it to a consolidation loan that needs to be paid off in a few years may break your budget.
  • You may be charged a fee – Some companies that offer personal loans charge an additional origination fee which ranges between one and six percent on the loan amount. Note that it is not easy to find interest free personal loans with a bad credit score.

It is important to bear in mind that personal loans or credit cards both impact your credit score. Before choosing to go the credit card debt consolation way, ensure that you take your time to consider all your options. You may not qualify for the best deals, but you’ll have the crucial knowledge to help you develop the next plan of action for effectively paying off your credit card debt.