Should I Take a Personal Loan to Pay Off Credit Card Debt?

According to a study, American citizens had a $1.031 trillion credit card debt by the end of Q2, 2023. This is $45 billion higher than that in Q1. After COVID-19, the credit card spending pattern suddenly rose in Q4 of 2021. Reasons for this could be loss of income or irregular income.

Many consumers hold debt on multiple credit cards. They often need to keep track of due dates to avoid penalties. According to the American Bankers Association, US citizens carry a balance on 56% of all credit cards they hold.

This article explains how you can use a personal loan to consolidate multiple credit card debts.

Personal Loans to Pay Off Credit Card Debt

If you have a good credit score but are stuck in credit card debt due to an unexpected life event, you can get a personal loan at a lower interest rate. For example, an unpredictable medical situation could have forced a borrower to use multiple credit cards.

Often, you are in a good financial position to pay off the debt, but the interest rates are high, and it is difficult to track the due dates on multiple credit cards.

Consider drawing a personal loan to consolidate the credit card debt at a much lower interest rate and with only one monthly installment.

Read further for the potential advantages and disadvantages of using a personal loan for credit card debt consolidation and other possible alternatives.

Advantages of Using a Personal Loan to Consolidate Credit Card Debt

Taking a personal loan to consolidate credit card debt makes financial sense in many situations. Here are some of its benefits –

Low Interest Rates

The average Annual Percentage Rate (APR) on a credit card in the US in 2023 is 24.45%. Secured credit cards and hotel and airline credit cards have high rates (around 27.03%, 25.58%, and 25.29%, respectively).

Compared to this, the average rate of interest on a personal loan in the US in 2023 is 11.31%. This could vary depending on your credit score and income. Getting a personal loan will reduce your interest payment. However, banks usually have a minimum limit between $1,000 and $5,000 for a personal loan. Credit card debts lower than this could be rejected.

Low Chances of Missing a Payment

Missing a payment can affect your credit score. If you have multiple credit card debts, each with a different payment date, you may miss out on paying the bills even if you have sufficient funds. A personal loan for debt consolidation has only one payment date, making tracking easy.

Increases Your Credit Score

Applying for a personal loan triggers a hard credit inquiry, which may slightly dip your credit score.

However, consistent regular repayments increase your credit score significantly. Using a personal loan to pay off multiple credit card debts can improve credit utilization (total credit card balances divided by total card limits). A credit utilization of 30% or lower can increase your credit score.

Disadvantages of Using a Personal Loan to Pay Credit Card Debt

Before choosing a personal loan to pay credit card debt, you must examine its downsides, too.

Greater Debt

Personal loans have a fixed monthly installment. Unlike credit cards, there is no option to pay a minimum amount.

If the installment fits your monthly budget, obtaining a personal loan could be great for you. It is best to avoid using your credit card until you have completely paid off your personal loan.

Monthly Payments May be Higher

A fixed monthly payment means that you will be paying a higher amount. However, it significantly reduces your interest amount.

You cannot pay a flexible EMI, implying that you consider your monthly repayment capacity before taking a personal loan. If necessary, cut down on extra expenses for a few months.

Personal Loan May Have a Fee

Some banks charge a processing fee or loan-origination fee upfront. This is a small amount, usually less than 6% of the total amount. Some lenders also charge a fixed fee rather than a percentage. Ensure that this does not equal the interest amount you save on credit cards. Do not include this fee in the loan amount. Pay it upfront, or you will be charged interest on the processing fee, too.

Some banks charge a fee if you prepay the loan, others do not. Go for personal loans that have minimum processing fees and zero prepayment charges.

Choosing the Best Personal Loan in the Market

Personal loan lenders in the market include private and government banks and non-banking financial corporations (NBFCs). Each will offer different terms and conditions, interest rates, and repayment plans.

Here are some pointers that will help you choose the right personal loan –

Loan Amount

Each lender will have a different minimum loan amount. The minimum amount and your credit score will determine how much loan you get. A higher credit score shows greater trust and makes you eligible for a higher loan amount and lower interest rates. If you require a small amount, choose a lender that offers a lower threshold.

Fee and Terms of the Loan

A good credit score may get you a processing fee waiver. However, if the score is low, you may want to choose a lender that has the lowest processing fee and a low penalty if you miss an installment.

Some lenders offer repayment duration as short as six months. Others go as long as five or seven years. A shorter loan may have a higher EMI but a lower interest amount, and vice versa for a longer-duration loan.

Lowest Interest Rate

Those with the highest credit scores get the best interest rates. The lower the interest rate, the lower your monthly EMI will be, and the less interest you will pay over the loan tenure. Choose a lender willing to tailor the best deal for your loan requirements.

Other Options to Manage Credit Card Debt

Other than obtaining a personal loan, there are several ways to consolidate credit card debt.

Balance Transfer Credit Card

Several credit cards let you consolidate the debt with a 0% annual rate for twelve to eighteen months. If you transfer the existing debt on a single card, you can avoid paying interest. However, such credit cards may have an upfront balance transfer fee, which you may want to check.

Negotiate a Lower Interest Rate

If you have a good relationship with your lender and a good credit score, try negotiating a better rate. This will let you pay the debt quickly and with a lower interest amount. If you have a history of late or missing payments, you are unlikely to get a lower interest rate from the lender.

Hardship Programs

Several credit card companies have hardship programs that assist lenders in situations such as sudden loss of employment or medical emergencies. In many situations, the lender waives off the installments and interest for a certain period till the time your financial situation is back on track.

Consider availing a hardship program rather than letting the credit card debt swell and accumulate interest.

Credit Counseling

A reputed credit card counseling agency can assist you in managing finances better, creating a budget, and any other guidance you need to close the debt. They also give you alternative methods to pay or consolidate credit card debt.

Debt Settlement Service

If your credit card debt has gone out of control and you think you can’t handle it, consider onboarding a debt settlement service. Such a service can help you negotiate a settlement with your credit card company. However, they have a steep fee, and settling the debt can adversely affect your credit score. This should be the last option in case the debt is too large and there is no other way to pay for it.

Process to Pay Credit Card Debt with a Personal Loan

If you have chosen a personal loan as your preferred medium to pay for the credit card loan, follow these steps –

Apply for a Personal Loan

Select the loan provider and the terms that suit you the best and apply for it against credit card debt consolidation. Look for a loan that matches your credit score. Use this money to immediately settle all the debts.

Pay Off the Personal Loan as Fast as Possible

Now that you have a single loan with one monthly installment, it is easy to keep track through reminders. Pay the installment before the due date, and if possible, prepay the loan.

Avoid Credit Cards for Paying Personal Loans

Do not use the credit card till you fully pay the personal loan. Doing so will put you in further debt that you may be unable to pay at current income.

Conclusion

If your credit card debt has become unmanageable, do not worry. A personal loan is one way to pay it off efficiently at lower interest rates. Without planning your income and expenses on paper, the credit card debt may appear intimidating. If the debt from multiple sources has already gone out of control, taking a personal loan could be the easiest way to manage everything in one place.

Learn more about personal loans at Epic Loans.

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