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People use personal loans for so many different reasons—from buying an RV to paying off medical bills—but consolidating your credit card debt may be one of the most popular uses. By taking the proceeds of a personal loan to pay off credit card debt, you can eliminate multiple monthly highinterest card payments and consolidate the debt into one monthly personal loan payment—often at a reduced cost.
There are benefits to using a personal loan to pay off a credit card, but it’s not always the best option for everyone. Before you choose a personal loan to pay off your credit card, make sure you know the pros and cons.
4 Benefits to Using a Personal Loan to Pay Off Credit Card Debt
If your goal is to get out of debt faster than you’d be able to by simply making the monthly minimum credit card payments, applying for a personal loan could be helpful. But a personal loan offers other benefits, as well.
1. You May Earn a Lower Interest Rate
You could pay 20% APR or more if you carry a credit card balance, although borrowers with excellent credit could pay roughly 12% to 17%, depending on the type of card they own.
Personal loans, on the other hand, charge an average interest rate of less than 10%. The best personal loans are even cheaper than that if you have a high credit score. That means you could cut your total interest payment in half and even pay off your debt sooner since you’ll be paying less in interest.
2. Consolidation Streamlines Payments
If you make many different credit card payments every month, it could be difficult to keep track of all the due dates and minimum amounts owed. If you miss a payment or don’t pay at least the amount due, you could face late payment fees and your credit score could drop.
By taking out a personal loan to consolidate your credit card payments, you’ll make one monthly payment to your loan rather than many payments. Reducing the number of payments can free up time and space for other responsibilities.
3. You Could Boost Your Credit Score
Taking out a personal loan increases your credit mix, which makes up 10% of your score. It shows creditors and lenders that you’re responsible with money by carrying many different types of credit and debt.
You’ll also lower your credit utilization by paying down your debt. Your credit utilization is the ratio of how much credit you’re using vs. how much credit is available to you. If you pay off your credit cards, your utilization will go down to 0%. Under 30%—and ideally under 10%—is considered great credit utilization and can help you improve your score.
4. You May Pay Off Debt Sooner
If you’re only making minimum credit card payments every month, it could take you years or even decades to pay off your balances, depending on how much you owe.
With a personal loan, you can pay off your credit card debt right away and set up a payment plan to repay your one personal loan. Terms vary based on how much you borrow and your lender. If you were on track to pay off your credit cards in 10 years, you could take out a personal loan and pay it off in less than five years. Just be sure you don’t restart the cycle by rebuilding credit card debt.
3 Drawbacks to Using a Personal Loan to Pay Off Credit Card Debt
There are some potentially negative consequences to consolidating credit card debt by taking out a personal loan, including the cost. Consider these drawbacks, as well, before making a decision.
1. Taking Out a Personal Loan Could Lead to More Debt
A personal loan means you’re borrowing more money. If you take out a personal loan to pay off your credit cards and start to carry a balance on those credit cards again, you’re racking up more debt than you had before.
A personal loan for credit card consolidation isn’t a debt eliminator; use it only if you’ve gone through other options, like increasing credit card payments every month or opening a balance transfer credit card.
2. You’re Not Guaranteed a Lower Interest Rate
Personal loans tend to offer lower interest rates compared to credit cards, but that might not be the case for everyone. If you don’t have stellar credit, you might not qualify for a personal loan. If you qualify for a personal loan with bad credit, your interest rate may not be any lower—and could be higher—than what you’re paying now.
3. Personal Loans Have Fees, Too
Some lenders charge many different fees, like a late payment fee, origination fee and insufficient funds fee, for example. Be mindful of this as you’re comparing personal loan lenders.
How to Choose the Best Personal Loan
There are many different personal loan lenders that charge different interest rates and fees and offer various repayment terms. There’s no one set of standards that personal loans follow, which means you could see a wide range of offers based on what you qualify for. When exploring personal loan options, consider:
- Interest rates. The best personal loans will offer the lowest interest rates to those with the highest credit scores. The higher your credit score, the lower your monthly payment will be and the less interest you’ll owe over the life of your loan.
- Terms. Your repayment terms also vary greatly depending on the lender. Some offer repayment terms as short as six months while some are upwards of five to seven years. If you want to pay off your loan sooner, find a lender that offers shorter repayment terms. If you need to keep your monthly payments lower, see if you can find a lender with longer repayment terms.
- Fees. The better your credit score, the more loans you can qualify for that don’t charge origination fees or other charges. If you don’t have great credit, evaluate each lender’s fees and see which ones you’re comfortable with in case you have to pay them. For instance, if you miss a payment, is the late fee $15 or $30?
- Loan amount. Some people don’t need to borrow a lot to pay off their debt, while others need to take out a substantial amount. Each lender offers different minimum and maximum amounts. Along with that, your credit score could impact how much you’re allowed to borrow. The higher your credit score, the more trustworthy you look to lenders, allowing you to borrow more.
Alternatives to a Personal Loan
While a personal loan is a great option for debt consolidation, it’s not your only one. Review all your options to see which one is the best fit for your finances.
Credit Card Balance Transfer
You may be able to apply for a new credit card that allows you to transfer balances from existing credit cards, perhaps as a lower interest cost to you. The benefits of a credit card balance transfer include:
- Interest-free payments. If you qualify for a 0% APR balance transfer, you won’t pay any extra interest charges for the promotional period, which would allow you to pay down your balance more cheaply.
- No balance transfer fee. Most credit cards charge a fee when you transfer a balance, but you can find a few that waive the balance transfer fee.
- New perks. If you have decent credit, you might qualify for a new card that offers cash back, travel perks or other types of deals for cardholders.
The drawbacks of a credit card balance transfer include:
- Eventual interest charges. If you don’t pay off the balance by the end of the promotional period, you could face interest charges on the remaining balance.
- Loss of promotional offer. Even though interest isn’t accruing, you’re still responsible for making minimum payments every month. If you don’t, you could lose your promotional offer and interest will start to add up on your entire balance.
- Missing out on qualification requirements. If you don’t have decent credit, you may not qualify for a new credit card line.
- Not having a high enough credit limit. Even if you do qualify, your entire balance might not transfer over because the card issuer offers you a lower credit limit than you need. This means you’re on the hook for the balance on your new card and any old cards that carry the remaining balances.
Debt Snowball Or Avalanche
You may also decide the best way for you to tackle your credit card debt is by focusing extra payments on one of your cards. There are two primary ways people go about this: either the debt snowball or debt avalanche method.
The benefits of using one of these methods include:
- Avoiding new credit lines. If you don’t have great credit or don’t want to take on additional debt, these methods let you focus on paying down your debt with what you have, not adding to your burden.
- Focusing on high interest. With the debt avalanche method, you pay off your debt with the highest interest rate first. This could save you more in the long run.
- Focusing on little wins. The debt snowball method focuses on paying off the debt with the lowest balance first. If you need a quick win, this might be your best bet.
Of course, these payoff methods also have their drawbacks. You may find:
- It’s a slow process. Increasing your payments with only the cash you have on hand right now means you may pay off your debt slower compared to a personal loan.
- Your budget doesn’t work with it. If your budget is already stretched thin as it is, you may not have any extra money to put toward higher credit card payments.
3 credit habits that you need to break
Are you using your credit card responsibly? Or do you have a few bad habits? Take a look at three common bad habits that people have with their credit cards and the best ways to stop doing them.
Habit 1: Pushing the limits
The first bad credit habit is pushing your outstanding balance close to its limit. What’s wrong with that? The first problem is that you’re giving yourself a larger debt load to contend with every month — one that accumulates interest the longer that it sits. It could be very difficult to pay down, and it could even lead to you maxing out your card.
The second problem with this habit is that it leaves you vulnerable to emergencies. You’ve taken up the majority of your available credit, so you can’t depend on it for unexpected payments. What if you need to pay for an urgent repair and there’s not enough room on your card? What can you do?
To avoid that difficult situation, you could apply for an online loan to help you cover the emergency costs and move forward. See how you can apply for an online loan in Ohio when you have no other safety nets to fall back on. It’s important that you only turn to this solution when you’re dealing with an emergency. It’s not for everyday purchases or small budgeting mistakes.
In the meantime, you should try your best to keep your credit utilization at 30% or lower — this means that your balance should be below the halfway point of your limit.
Habit 2: Paying the minimum
You pay your credit card bills on time, but you only give the minimum payment. While this habit can stop you from racking up late fees and penalties, it can still get you into hot water if you’re not careful.
Only paying the minimum for your bill will make it very difficult for you to whittle down the balance, especially when you’re continuing to charge expenses on your card. You’re only taking $20-$25 off a growing pile.
So, what can you do? If you’re paying this amount by choice, stop it — you’re only making things harder for yourself down the line. If you’re paying this amount because you don’t have any more funds, look at your budget to see whether you can cut your monthly costs to get more savings and use them to tackle your balance.
Habit 3: Using it for every single expense
You don’t need to put every single expense on your credit card. Your morning coffee? Your afternoon snack? Putting these small, everyday expenses on your card is a habit that can make your balance climb quickly.
You also don’t want to put some very important expenses on there, like mortgage payments. For one, these payments are large and will take up a significant amount of your credit. Secondly, if you need to use a credit card to make these payments on time, you need to reinvestigate your budget to see whether you can actually afford your living space.
So, what you should you do? Use a debit card, cash or checks to pay for the items above. Only put expenses on your credit card that you’re positive you can pay off in a reasonable timeframe.
Don’t let these bad habits drag you down and get you into financial trouble. Break them now, before it’s too late.
Free credit reports have been extended; here’s why it’s important to check yours regularly
Typically, you’d be able to check your credit report — at least for free — just once annually through each of the three major credit reporting agencies. But thanks to the coronavirus pandemic, credit reports are now more accessible than ever.
Credit reporting companies Equifax, Experian and TransUnion are all offering free credit reports weekly through April 20, 2022.
The move means better insight into your financial health during what, for most, is an economically challenging time. According to experts, it might also be a time that’s ripe for at-risk personal information and identity theft, too — even more reason consumers should be checking their credit on the regular.
Have you checked your annual credit lately? If not, here’s what you need to know about these free nationwide credit reports and how to get them. If you’re not sure where you fit on the credit score spectrum, you may want to start using a credit monitoring service to track changes to your credit score. Credible can get you set up with a free service today.
Free credit reports for all?
The nation’s three credit bureaus initially started offering free weekly credit reporting last year, just after the pandemic began. In early March, they announced they’d extended the offer for another year, this time through April 20, 2022.
To request your free credit reports and access copies, you can go to AnnualCreditReport.com and provide some basic information to verify your identity (things like your date of birth, Social Security Number, and address).
Once your report is ready, you should see a detailed list of all open and closed accounts in your name, your payment history, recent credit activity and more.
Protect yourself from identity theft
There are many reasons why checking your credit activity is important, but chief among them? That’d be the prevalence of data breaches in today’s world — not to mention the risk of identity theft they come with.
“In the past, it was perfectly acceptable for people to check their credit history once a year, but now with security breaches happening on a regular basis, consumers should be monitoring their credit more closely than ever,” said Clint Lotz, president and founder of TrackStar.ai, a predictive credit technology firm.
Lotz said the Equifax breach — which exposed over 147 million Americans’ personal information in mid-July 2017 — is the perfect example of why watching your credit report is important as far as identity theft protection goes. The pandemic, he said, adds an extra layer of risk to things.
“It took them [Equifax] months before they even realized they had been hacked, and considering that they hold files on hundreds of millions of Americans, it’s fair to say that many identities were stolen by the time they caught up to it,” Lotz said. “With many of us worrying about very serious issues not related to our credit, it’s a prime time for that stolen data to be put to work by bad actors in slow, methodical ways and in the hopes that nobody notices it.”
More reasons to check your credit
Checking your credit health often isn’t just good for detecting fraud alerts and to protect your identity, though. You can also monitor your report for errors — things like inaccurately reported late payments, for example — and then dispute those with the credit bureau.
If the error gets corrected, it could improve your credit score and make a jump from bad credit to a FICO score that’s more favorable. Not sure of your credit score? Head to Credible to check your score without negatively impacting it.
You can also use your credit reports and scores to monitor your financial habits — like the timeliness of your payments or how much debt you have left to pay off. Both of these factors can play a big role in your score, as well as how likely you are to get approved for loans, credit cards and other items.
“If you’re taking out a loan, getting insurance or even applying for a new job, checking your credit will allow you to see an overview of what would be seen by others looking at your credit,” said Leslie Tayne, a debt relief attorney with the Tayne Law Group. “Staying up-to-date on your credit reports and information allows you to know exactly where you need to improve.”
Want to be sure your credit is stellar before applying for a loan or insurance policy? Consider Credible’s partner product Experian Boost, which lets you use positive payment history on utilities, streaming and other bills to improve your credit score.
Set up a monitoring service, too
Though checking your credit reports manually is smart, you should also consider signing up for a credit monitoring service. These consumer financial services check your credit information and score regularly and alert you of any changes.
If you’re interested in monitoring your credit or improving your score, head to Credible and learn more about how Experian can help. You can also use Experian Boost to get credit for on-time bill payments.
Have a finance-related question, but don’t know who to ask? Email The Credible Money Expert at [email protected] and your question might be answered by Credible in our Money Expert column.
Do Personal Loans Have Penalty APRs?
Select’s editorial team works independently to review financial products and write articles we think our readers will find useful. We may receive a commission when you click on links for products from our affiliate partners.
The Blue Cash Preferred® Card from American Express, for instance, has a 13.99% to 23.99% variable APR, but the penalty APR is a variable 29.99% (see rates and fees). Penalty APRs usually last for at least six months, but card issuers often reserve the right to extend them — especially when you continue making late payments. A look at the terms for the Citi® Double Cash Card show us that the “penalty APR may apply indefinitely.”
Penalty APRs are certainly not a trap you want to fall into, but it’s not something you usually have to worry about if you have a personal loan. Personal loan lenders can, however, charge late fees upwards of $39 per late payment. Whether your loan charges late fees all depends on how good of a loan you qualify for, and that comes down to your credit score, borrowing history and ability to make your payments.
Personal loans also tend to charge lower interest rates than credit cards, too. The average personal loan interest rate for two-year loans is currently 9.46% according to Q1 2021 data from the Federal Reserve, compared to 15.91% for credit cards.
Typically, interest rates for personal loans range between roughly 2.49% and 24%, but personal loans for applicants with bad credit can come with even higher APR — so do your research before applying.
Other common personal loan fees include:
- Interest: The monthly charge you pay to borrow money
- Origination fee: A one-time upfront charge that your lender subtracts from your loan to pay for administration and processing costs
- Late fee: A one-time fee charged for each payment that you fail to make by the due date or within your grace period
- Early payoff penalty: A fee incurred when you pay off your balance faster than planned (because the lender misses out on months of expected interest payments)
As you can see, personal loans can be costly, even without a penalty APR. It’s obviously best to avoid paying extra fees whenever possible. That’s easier to do when you have a good to excellent credit score, since you’ll qualify for better loan options.
None of the loans on our best personal loan list charge origination fees or early payoff penalties, but some may charge late fees.
Find the best personal loans
For rates and fees of the Blue Cash Preferred® Card from American Express, click here.
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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