Would you consider taking out a personal loan to pay off your credit card debt? Many people do. I did, when I reached my financial tipping point .
I learned a lot along the way to determining whether using a personal loan to pay off my credit card debt was a good move. I thought I?d share some of this with you.
Credit card debt is some of the worst debt you can have because it is unsecured, meaning there is no collateral backing up the debt, so it carries some of the highest interest rates.
What it does have going for it is low monthly payments.
Any personal loan is going to have a shorter term than a credit card because credit cards in effect have no term. They?re called revolving debt because the term is effectively extended every month.
This means that you will not find a personal loan with monthly payments as low as a credit card.
Benefits of a personal loan compared to credit cards
In contrast to credit cards, a personal loan has a defined term and typically much higher monthly payment than a credit card?s minimum payment.
It may seem like a credit card is a better deal since you can make minimum payments forever and not be penalized.
You may not get penalized, but you do pay the price.
Personal loans are better because they force you to be more disciplined ? higher payments for a shorter time force you to actually pay back the debt and with less total interest.
With a good credit history, you can easily get a better interest rate than you can with a credit card.
Restructuring is not paying off
The single most important thing to take away from the personal loan to pay off credit card discussion is that paying off your credit card with a personal loan does not pay off the debt.
This just restructures the debt. It?s a fancy way of saying you?re trading your credit card debt for a loan, but you still need to pay it back.
This is where most people fall into the trap.
It?s very easy to think you?ve paid off that credit card bill once and for all, and begin building up a balance again. Now you?ve got a personal loan and credit debt again.
If you take out a personal loan to pay off your credit card ? stop using the credit card. At least until the loan is paid off.
It really is that simple.
When it pays to pay off your credit card with a personal loan
Using a personal loan to pay off credit card debt might make sense if:
- You can get a lower interest rate on the personal loan than on your credit card
- You can get a lower monthly payment on the personal loan. (You?d have to have a pretty high credit card balance in most cases for this to be true?)
- You can consolidate multiple credit card debts into one personal loan.
It?s the last situation where a personal loan provides the best benefit.
By consolidating multiple credit card payments into one single personal loan payment, you can focus all you energy (and extra cash) on paying off the debt for good.
Bottom line
In my situation, I chose to consolidate two outstanding credit card balances into one, so I would have a single payment to focus on.
I was considering a personal loan until I realized that I could get a 0% balance transfer from a 3rd credit card for 18 months.
What made this move a success though was that I stopped using my credit cards while I paid as much as possible every month until the balance was cleared. I?m happy to say that I was able to do this within the 18 month time frame, so I paid 0% interest on almost $10,000 in credit card debt!
I realize that 0% balance transfer offers are not as generous as they were before the financial crisis of 2008, so a personal loan might be the best way to consolidate the debt.
Whether you use a personal loan to pay off credit card debt or not, the key to successfully paying off your credit card debt is to stop using your credit card. After that, it?s only a matter of how much you can pay each month.
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Source: http://simpledebtfreefinance.com/using-a-personal-loan-to-pay-off-credit-card-debt-can-be-perilous/
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