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Applying for your first credit card is thrilling and for many, their whole world takes a turn for the better. It doesn’t matter how much cash you have in your pocket or how loaded your savings account is, you suddenly have access to what seems like unlimited funds.

But things can get a little out of hand when it comes to spending, and now you’re on the hook for thousands of dollars in credit card debt. The good news is, you might be able to consolidate your debt to ease your current financial situation. We are going to share the advantages of using a personal loan to consolidate your credit card debt, when it makes sense and more. 

What Does it Mean to Consolidate Credit Card Debt?

When you consolidate your credit card debt, you’re combining your credit card dues into one monthly payment. This is made possible by taking out a personal loan to help pay off your creditors. By doing so, you’re preventing the continued build-up of interest on your credit card debt, and you might even be able to pay off your debt quicker. 

A personal loan to pay off your credit card debt might also be monumental in saving your credit score, which is now steadily dropping with every missed credit card payment. In the long haul, you might even be able to reduce the amount of money that you would owe if you didn’t use a personal loan.

Sara Rathner, a personal finance expert at Nerd Wallet advises, “[d]on’t forget the other terms of the loan, too. Unlike credit cards, which allow you to make minimum payments while continuing to use the card, you must pay off a personal loan completely over a set period of time.”

Consolidating your credit card debt with a personal loan is a great idea in theory, but it doesn’t benefit everybody in the same way. That’s why we’re going to be reviewing specific circumstances where a personal loan would be a good idea.

Advantages to Using a Personal Loan to Pay Off Credit Card Debt

Chase Peckham, Director of Community Outreach for the San Diego Financial Literacy Center (SDFLC), and host of the Talk Wealth To Me financial education podcast shares some advantages of paying off credit card debt with a personal loan. 

Peckham advises you to look into all of your options before adding an additional loan, but if you do decide to go with a personal loan to consolidate, these are the advantages:
  • [C]ombine accounts to have one monthly payment. Easier to remember one payment versus many different due dates.
  • Credit score could go down as the credit cards will no longer have a balance (be careful as this could be fleeting).
  • Your payment could be lower than the combined minimum payments of the credit cards.
  • The rate could be locked in for the duration of the loan terms as most credit cards have variable interest rates these days.
  • There is an end date to paying off the debt. When you take out the loan there is set repayment schedule so you will know exactly when you will become debt free.

Related: Should You Consolidate Your Credit Card Debt?‍

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When a Loan Has a Lower Interest Rate

Woman playing with credit card on her laptop.

As you continue to miss complete payments on your credit card bills, the amount you owe in interest begins to skyrocket. 

Sudhir Khatwani, Editor-In-Chief at The Money Mongers shares, “Credit card interest rate (APR) is generally greater than 12-15 percent per year and there’s no point in continuing to pay that kind of interest, if you can get a personal loan at a lower interest rate.” 

“If you can take out a loan at 6% for which let say you are eligible, you can use this loan amount to repay or clear off your outstanding dues of credit card on which you might be paying let say 15%. This way you can save extra 9% (15%-6%=9%) of your cash flow which was easier going in servicing credit card dues,” Khatwani continues. 

Since the median credit card interest rate is around 15%, you’ll be required to pay a lot more in interest than you might be able to reasonably pay. As the interest begins to pile up, you might feel as if you’ll never be able to pay off this debt in your lifetime.

Personal loan payment plans are a bit different. You’ll be given a loan with a fixed interest rate and a monthly payment plan that you’ll have to stick to. Since the interest rates for personal loans can be as low as 6%, you won’t be spending as much to pay back your debt in the long-term (as compared to letting interest on your credit card debt accumulate).

Better yet, you know exactly how much you owe every month and can develop your own budget to make paying back your personal loan even simpler. Just make sure your loan has a lower interest rate than your credit card; otherwise, it’s not worth it.

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When You Have Multiple Credit Cards

While you can pay off a single credit card with a personal loan, you wouldn’t be consolidating your debt unless you had more than one credit card that you needed to pay off. Having more than one active credit card means you’re accumulating interest on every balance that you currently owe.

Since paying off your credit card debt isn’t in the cards right now, you’re probably trying to figure out which debt you can pay and which you can’t. At the same time, every time you miss a payment for one card, you’re hurting your credit score in the long run.

By consolidating your debt, you can pay all of your creditors right now and pay one monthly payment instead of several (or having to decide which card you’ll make payments toward). Once your cards are paid off, it might be a good idea to cancel some cards.

When You Have a Great Credit Score

If you normally have great or excellent credit but have recently come into financial hardship that makes paying your creditors not feasible right now, a personal loan is actually your best choice for saving your credit score. 

Since you have a high credit score, it’ll be much easier for you to get approved for a loan. That high credit score will also be your savior when it comes to getting a low-interest rate loan, meaning lower monthly payments.

However, you need to be sure that you’re paying your monthly payments for your personal loan if you want to keep your credit score thriving. You also need to make sure that you’re applying for the personal loan before your credit card debt gets overwhelming, and your credit score starts to tank.

When You Need More Time to Pay Off Your Debt

Man and woman doing paperwork together.

There’s also the possibility that you have the funds, but you just don’t have access to them right now. Perhaps you’ve recently started a new job and know you’ll be able to pay off the debt as soon as those paychecks start rolling in.

While you’re waiting to be able to pay off your credit card debt, interest is being tacked on and you’ll end up paying more in the future. Getting a personal loan can put a halt on the interest and help to keep your credit score stabilized.

Just remember that your monthly payment schedule for a personal loan might be a year to more than five years. There are also often penalties if you decide to pay your loan back sooner than it’s due. 

As much as you want that loan paid off as soon as you have the money, it’ll be in your best interest to allow the loan period to come to its natural end.

When you Shouldn’t Use a Personal Loan to Consolidate Credit Card Debt

Using a personal loan to consolidate your credit card debt isn’t always the best option for everyone. 

Rathner, from Nerd Wallet shares, “If you don’t have good or excellent credit, you may not qualify for a personal loan with an interest rate that’s lower than what your cards already charge you. In that case, a personal loan won’t help you save on interest.”

Greg Mahnken Credit Industry Analyst at Credit Card Insider adds, “If you have good credit and can take advantage of a credit card offering an introductory 0% APR balance transfer, you could save even more than with a personal loan.” 

“If you can pay off the card's full balance before the transfer offer period ends, you can avoid paying interest altogether, which isn't possible with a personal loan,” Mahnken elaborates. 

Should you Use a Personal Loan to Consolidate Credit Card Debt?

If you have a great credit score right now or can secure a personal loan with a lower interest rate than your active credit card, it would be silly not to apply for a personal loan. 

You’ll also want to look into a personal loan if multiple credit card debts are overwhelming or if you’re looking to salvage your credit score.

Do your research and make sure you’re making a smart decision, not an impulsive decision.

You might also be interested in: Should You Consolidate Your Credit Card Debt?

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Posted 
May 7, 2020
 in 
Money
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