Month-to-month credit card debt can dramatically drain your budget due to interest charges. This is a problem that plagues many American households, given that revolving consumer credit was up 7.9% in March 2021, according to the Federal Reserve.
When you’re struggling to tame unmanageable credit card balances, it can feel like you’re throwing money at your debt each month without actually paying it down. If this sounds familiar to you, 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 unrecognized 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 payments compared to credit cards.
Keep reading to learn 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 type of rate you qualify for, all without affecting your credit score.
WHEN TO USE A PERSONAL LOAN ON A CREDIT CARD
In figures: how much money a personal loan could save you
Personal loans tend to 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 lead to significant cost savings over time, and you could potentially pay off debt faster or lower your monthly payments.
Let’s compare these two scenarios using these interest rates on $ 10,000 credit card debt.
- Scenario 1: Pay off debt faster. A $ 10,000 personal loan with an interest rate of 9.46% and no origination fees would take two years to repay, assuming monthly payments of $ 459. If you paid the same amount for your credit card debt each month at an interest rate of 15.91%, it would take you four more months to pay off that debt – and that would cost you almost $ 700 more than if you used a personal account. ready.
- Scenario 2: Lower your monthly payments. TThe minimum monthly payment on $ 10,000 of credit card debt is typically $ 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 can 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 IT IMPORTANT TO HAVE GOOD CREDIT?
How to get the lowest personal loan rates
Although they are generally lower than credit card interest rates, personal loan interest rates can vary widely, from around 4% to 36%. This is why it is 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 payments 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 the three credit bureaus on www.AnnualCreditReport.com to check for errors.
- Work on improving 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 score instead of a bad credit score or even a fair credit score. Use a cash windfall like a stimulus check or a tax refund to pay off some of your credit card debt and cut your credit usage for a quick boost. Keep track of your progress with free credit monitoring from Credible.
- Get pre-approved by multiple lenders. Different personal lenders will charge varying interest rates, so it’s important to pre-qualify to check your potential interest rates. The easiest way to do this is on an online loan market like Credible, which allows you to compare rates from multiple lenders at once without affecting your credit score.
5 WAYS TO GET OUT OF DEBT IN 2021
Adopting better financial habits can help you avoid going into 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 overuse your credit cards while paying off your personal loan. It may be tempting to increase your credit card balance again, but it can leave you in the same situation as you were before, or worse.
Creating a budget and sticking to it can keep your spending in check. Building an emergency fund can help you avoid having to rely on credit cards when an unforeseen expense arises. And tracking 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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