Why It Pays to Use a Personal Loan to Pay Off Credit Card Debt
- Credit cards are notorious for charging a lot of interest.
- Personal loan interest rates can be far more affordable, especially if you have good credit.
It's a matter of making your debt more affordable.
Many people wind up with credit card debt for one reason or another. For some, it's a matter of getting stuck with emergency expenses. For others, it's a matter of losing track of spending.
No matter why you've landed in credit card debt, your goal should be the same -- to shed that debt as quickly as possible so as to minimize the amount of interest you accrue on it. But one tactic you may want to employ in the course of paying off your credit cards is to take out a personal loan and use the proceeds from that loan to eliminate your balance. Here's why that's a smart move to make -- even if it does mean swapping one type of debt for another.
A personal loan might cost you less
A personal loan allows you to borrow money for any reason, just as you can use a credit card to charge a host of expenses, from groceries to car repairs to medical bills. And so you can use the proceeds from a personal loan to pay off a credit card balance.
But one benefit of a personal loan over credit cards is that these loans tend to charge a lot less interest. And that could make your debt a lot less expensive to pay off.
Let's imagine you owe money on a credit card charging 18% interest. You might qualify for a personal loan at 8% interest. And the lower your interest rate, the less money you end up spending.
What’s more, if you have a really high credit score, you might manage to snag a very affordable rate on a personal loan. Not only that, but personal loans come with fixed interest rates, whereas credit cards tend to come with variable interest rates. That means the rate you lock in when you sign your personal loan is guaranteed to stay the same until your debt is paid off.
With a credit card, variable interest could have you paying more and more interest as your debt is carried forward. The result? A tougher time paying off your debt and more money wasted.
How to qualify for a personal loan
Personal loans are unsecured, which means they're not tied to a specific asset you put up as collateral. As such, you'll generally need decent credit to qualify for a personal loan.
Now, there are some personal loan lenders who work with applicants with poor credit. But if that's the situation you're in, you'll need to see what interest rates become available to you. It may be the case that with poor credit, the borrowing rate you get on a personal loan isn't that much more favorable than what you're paying on your credit cards. In some cases, it might even be less favorable.
That said, if you're able to snag a personal loan rate that's comparable to what your credit cards are currently charging, it could pay to lock that loan in because that way, your interest rate will at least be fixed. With a credit card, you run the risk of your interest rate rising.
All told, paying off your credit cards with a personal loan could be a smart bet. It pays to shop around and see what personal loan rates you're able to qualify for.
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