There are many reasons people want to get rid of their credit card debt. Not only can it be a hassle to keep track of and make payments on your balances each month, but it’s also one of the most expensive types of debt to carry.
According to data from WalletHub, the average interest rate on new credit card offers is nearly 18 percent, while the average interest rate for existing accounts is nearly 15 percent. Some people face even higher interest rates, exceeding 20 or even 25 percent, on any balance carried over month to month. As you can imagine, these high interest rates — coupled with the compounding nature of said interest — can lead to hundreds or thousands of extra charges on top of the original balance.
Paying off credit card debt with a personal loan is one possible way to reduce how much interest you end up paying. Here are some questions to ask as you evaluate whether this strategy could benefit you.
What Loan Terms Can You Get?
The biggest deciding factor in whether or not it’s wise to pursue a debt consolidation loan is the loan terms for which you can qualify.
Your credit score will be the most influential component on your loan terms, although lenders will also consider your income, your debt levels, and other figures as well when making a decision.
Want to know how much power credit score has on estimated annual percentage rate (APR)? Here are some estimates from NerdWallet:
- Borrowers with excellent credit (720-850) may qualify for 11.8 percent APR.
- Borrowers with good credit (690-719) may qualify for 17.4 percent APR.
- Borrowers with fair credit (630-689) may qualify for 23.4 percent APR.
- Borrowers with poor credit (300-629) may qualify for 28.7 percent APR.
A consolidation loan is only worthwhile if it ends up saving you money compared to paying down your credit cards the traditional way. So, this strategy tends to be a more viable option for borrowers with good or excellent credit as compared to borrowers with fair to poor ratings.
Will a Loan Save You Time and Money?
On this note, it’s also vital to look at not only how much you’d be paying per month, but how much you’d be paying in total. So, loan length really matters. If you’d be able to pay off your credit cards on your own in about five years but would have to take out a seven-year loan to make it work, chances are you’ll only be making the process longer and more costly for yourself, even if your monthly payment appears more manageable.
Factor in any fees associated with personal loans, too — like an origination fee due to the lender.
Can You Avoid Accumulating More Debt During Repayment?
Perhaps the worst possible outcome would be taking out a personal loan, using it to pay off your credit card balances, then starting to accumulate new charges on those credit cards — leaving you with old debt and new debt to handle simultaneously. One of the major possible drawbacks of consolidation loans is ending up with even more debt than you had before.
Part of making a personal loan work is addressing and changing the spending habits that exacerbated your credit card debt in the first place.
Should you pay off your credit card debt using a personal loan? If you’re able to qualify for a low-interest loan that will save you time, effort and money — and can avoid amassing more credit card debt in the wake of the loan — then it may be worth it