For some borrowers, this means relying on credit cards with eye-watering interest rates and fees. Worryingly, research from credit referencing bureau Experian has found that the average American has a staggering $6,194 in credit card debt.
If you’re concerned about mounting credit card debt, one option could be to pay off what you owe using a personal loan. Here, we explore the pros and cons of this approach to help you decide if it could be right for your finances.
How Does It Work?
Using this approach, you simply transfer your debt from one borrower (a credit card company) to another (a loan company). Ideally, your new loan will have a lower interest rate than you are currently paying on your credit card(s). You can then pay off your debts more quickly via a single monthly payment.
Before you transfer your debt, however, it is sensible to check your credit score. This will provide you with an indication of whether you’re likely to be accepted for a loan and the type of interest rates you could qualify for. You can check your credit score through the three main credit referring agencies: TransUnion, Experian, and Equifax.
Once you know your credit score, you can compare a range of lenders to find the most competitive deal for you.
Depending on the provider you choose, the loan company may send the money directly to your credit card company. Otherwise, you can take the money from your personal loan and pay off your credit card(s) yourself. You can then begin making repayments to the personal loan company.
When Should You Get a Personal Loan for Credit Card Debt?
Deciding whether you should use a personal loan to consolidate your debt requires careful consideration of your financial circumstances and spending habits. However, this could be the right decision for you if any of the following apply:
You could lower your interest repayments
Shifting your credit card debt onto a personal loan often makes sense if you qualify for a lower interest rate on the new loan than you had previously been paying. This reduces the overall amount you’ll need to repay and can speed up your return to financial health.
Remember, however, that you’ll normally need a good or excellent credit score to qualify for the best personal loan rates. Many lenders will offer their most attractive loans to borrowers with scores of 670 or above.
You could consolidate your debt into a single payment
Keeping on top of all your repayments can be tricky if you owe money to several different credit card companies. In this scenario, you could accidentally miss a payment, which could leave you facing expensive late payment fees.
By shifting your debts from several cards onto a personal loan, you’ll only need to make a single repayment each month. This can make it easier to understand how much you have left to spend once you have made your payment debt repayments.
You don’t want to get trapped in vicious cycle of debt
One of the main disadvantages of a credit card is that it always offers the temptation to get into more debt.
Because credit cards allow you to spend up to a maximum limit in each billing cycle, you could become dependent on these funds each month to cover your living costs or luxuries. This could mean that you are never able to pay off your debt.
A personal loan can help remove some of this temptation. Once you have used the money from your loan to clear your card debt, you will not have access to further credit on your loan.
As personal loans require you to pay a set amount each month, you’ll also have a time frame for when you can become debt free.
When Is It Not a Good Idea to Get a Personal Loan for Credit Card Debt?
Despite the potential benefits of consolidating your debt onto a personal loan, this approach won’t be right for everyone.
Signs that a personal loan may not be suitable for you include:
The loan comes with high fees
When you’re taking out a personal loan, it’s important to remember that these products typically include fees as well as interest repayments. These charges can include application fees, early repayment fees, and late payment penalties.
It is essential you factor these fees into the overall cost of your loan. In certain cases, high fees could mean that the product is more costly than your existing credit card.
You only need to borrow a small amount
Taking out a personal loan may not be appropriate for you if you only have a small amount of debt. This is because personal loan providers only allow you to borrow between a minimum and maximum amount.
Although all lenders differ, the minimum amount for a personal loan is often between $500 and $1,000. If you owe less than this, a more sensible option could be to continue to pay down your existing credit card debt as quickly as possible.
Unsurprisingly, a personal loan may also not be suitable if you have an extremely high level of credit card debt. While some personal loan companies may allow you to borrow up to $100,000, you may want to seek professional advice if you have this level of credit card debt.
Your debts are keeping you awake at night
While being in debt is common, there are warning signs that your debts may be becoming unmanageable. In this case, simply switching from one product to another is rarely the solution.
It could be time to seek expert support if your debts are causing you constant anxiety, interfering with your day-to-day life, or keeping you awake at night. Debt support services can review your financial circumstances and discuss your options for clearing your debt.
Organizations offering support with problem debt include Debt.org and the National Federation for Credit Counseling. The US government’s website also offers advice on dealing with problem debt.
Personal Loans: Advantages vs Disadvantages
| Pros | Cons |
Personal loans often offer lower interest rates Paying less interest allows you to repay your debt more quickly and cheaply Possible to consolidate debt into one monthly payment Could remove the temptation to get into more credit card debt Fixed monthly repayments over a set time frame | Loans may include high fees Lenders require maximum and minimum borrowing amounts Taking out a new financial product could impact your credit score Loan providers reserve their best rates for those with high credit scores |
Our Top Personal Loans for Paying Off Credit Card Debt
There are a number of attractive options on the market if you decide to shift your credit card debt.
Here are our top options:
Credible
Credible allows you to compare a range of personal loans to find the most suitable product for your circumstances. With more than 2.2 million users and an excellent rating on Trustpilot, the company offers pre-qualified rates, and you can use your loan however you see fit. At the time of writing, rates vary from 5.4% to 35.99% and you can borrow between $600 and $100,000.
Lending Tree
As the US’s largest financial online marketplace, Lending Tree provides free access to loan offers from more than 300 lenders. The company also allows you to check your credit score, and offers tips to improve your rating. Likewise, Lending Tree will offer you personalized savings recommendations on your household bills.
Summary
Whether or not you should transfer your credit card debt to a personal loan will ultimately depend on your circumstances. This approach may help you lower your interest rate and consolidate your debts into one monthly payment. However, you should also read the fine print carefully to check for hidden fees.
The golden rule: if you decide to take out a personal loan, try to compare as many deals as possible. This way, you can see a selection of the best personal loans for your needs.
