Carrying credit card debt from month to month can significantly drain your budget due to interest charges. It’s a problem plaguing many U.S. households, knowing that revolving consumer credit grew 7.9% in March 2021, according to the Federal Reserve.
When you struggle to tame your unmanageable credit card balances, it can feel like you’re throwing money at your debt each month without actually paying it off. If this sounds familiar, consider using a personal loan to consolidate your credit card debt.
While virtually everyone knows how to use a credit card, personal loans are a largely misunderstood financial product. Personal loans are simply lump sum loans that are repaid in regular monthly installments over a set period of months or years. Because individuals have fixed interest rates, it’s easier to track your debt repayments compared to credit cards.
Keep reading to find out how to pay off credit cards using a personal loan. You can shop Credible’s online marketplace to get pre-approved for personal loans and see what kind of rates you qualify for, all without affecting your credit score.
WHEN TO USE A PERSONAL LOAN ON A CREDIT CARD
By the numbers: how much money a personal loan could save you
Personal loans generally have lower interest rates than credit cards. The average interest rate on a 24-month personal loan is 9.46%, according to the Fed’s first quarter 2021 data. In contrast, the average interest rate on revolving credit card balances was 15.91% for the same period. With that in mind, personal loans can result in significant cost savings over time, and you could potentially pay off your debt faster or lower your monthly payments.
Let’s compare these two scenarios using these interest rates on $10,000 of credit card debt.
- Scenario 1: Paying off debt faster. A $10,000 personal loan with an interest rate of 9.46% and no origination fees would take two years to pay off, assuming monthly payments of $459. If you paid the same amount for your credit card debt every month at an interest rate of 15.91%, it would take you four more months to pay off that debt – and it would cost you nearly $700 more than if you had used a personal account. ready.
- Scenario 2: Lower your monthly payments. JThe minimum monthly payment on $10,000 in credit card debt is usually $400 per month. Assuming the same interest rates, it would take you 31 months to pay off the debt and cost you over $2,200 in interest. With a four-year personal loan, you could reduce your monthly payments to $250 per month, while paying slightly less interest over time.
Use Credible’s personal loan calculator to see how quickly you can pay off your high-interest revolving credit card debt.
WHY IS GOOD CREDIT IMPORTANT?
How to get the lowest personal loan rates
Although generally lower than credit card interest rates, personal loan interest rates can vary widely, from around 4% to 36%. That’s why it’s important to shop around for the lowest possible interest rate for your financial situation. Here are some tips to achieve this:
- Check your credit score. Since personal loans are generally unsecured, lenders set interest rates based on the borrower’s credit history. A late payment can hurt your credit score, so be sure to stay on top of your monthly payments. Most banks give their customers free access to their credit scores. You can also request a free copy of your credit report from all three credit bureaus at www.AnnualCreditReport.com to check for errors.
- Work to improve your credit score, if necessary. The higher your credit score, the lower the interest rate on your personal loan. Obviously, it is more desirable to have an excellent credit score or a very good credit score rather than a bad credit score or even a fair credit score. Use a financial windfall like a stimulus check or tax refund to pay off some of your credit card debt and reduce your credit usage for a quick boost. Track your progress with Credible’s free credit monitoring.
- Get pre-approved from multiple lenders. Different personal lenders will charge varying interest rates, so it’s important to prequalify to check your potential interest rates. The easiest way to do this is at an online lending marketplace like Credible, which lets you compare rates from multiple lenders at once without affecting your credit score.
5 SURE WAYS TO GET OUT OF DEBT IN 2021
Adopting better financial habits can help you stay out of debt
Paying off your credit cards with a personal loan will reduce your credit card balance to zero, which could have an immediate positive effect on your credit score and help you avoid damaging your credit. But be careful not to abuse your credit cards while paying off your personal loan. It can be tempting to increase your credit card balance again, but it can leave you in the same situation you were in before, or even worse.
Setting a budget and sticking to it can control your spending. Building an emergency fund can ensure you don’t have to resort to credit cards when an unexpected expense arises. And monitoring your credit score can help you track your personal financial goals.
You can search for a variety of financial products on Credible, from debt consolidation loans to high-yield savings accounts. Visit Credible’s online financial market to get started.
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