Carrying credit card debt from month to month can significantly drain your budget due to interest charges. This is a problem that's plaguing many American households, considering 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 just throwing money at your debt every month without actually paying it down. If this sounds familiar, consider using a personal loan to consolidate 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 consistent monthly payments over a set period of months or years. Because personal have fixed interest rates, it's easier to track your debt repayment when compared with credit cards.
Keep reading to learn how to pay off credit cards using a personal loan. You can shop around on Credible's online marketplace to get preapproved for personal loans and see what kind of rates you're eligible for, all without affecting your credit score.
By the numbers: 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%, per Q1 2021 data from the Fed. In contrast, the average interest rate on revolving credit card balances was 15.91% for the same time period. With this in mind, personal loans can lead to 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 worth of credit card debt.
- Scenario 1: Paying off debt faster. A $10,000 personal loan with a 9.46% interest rate and no origination fees would take two years to pay off, assuming monthly payments of $459. If you paid the same amount toward your credit card debt each month at a 15.91% interest rate, it would take you four extra months to pay off that debt — and it would cost you nearly $700 more than it would if you had used a personal loan.
- Scenario 2: Lowering your monthly payments. The minimum monthly payment on $10,000 worth 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 more than $2,200 in interest. With a four-year personal loan, you could lower your monthly payments to $250 per month — and still pay slightly less in interest over time.
Use Credible's personal loan calculator to see how quickly you can pay off your high-interest revolving credit card debt.
How to get the lowest personal loan rates
While they are typically lower than credit card interest rates, personal loan interest rates can vary widely, from about 4% to 36%. That's why it's important to shop around to get the lowest possible interest rate for your financial situation. Here are some tips for doing just that:
- Check your credit score. Since personal loans are usually 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 access to their credit scores for free. You can also request a free copy of your credit report from all three credit bureaus on www.AnnualCreditReport.com to check for errors.
- Work on improving your credit score, if necessary. The higher your credit score is, the lower your personal loan interest rate will be. Obviously, it's more desirable to have an excellent credit score or very good score instead of a poor credit score or even fair credit score. Use a cash windfall like a stimulus check or tax refund to pay down a chunk of your credit card debt and lower your credit utilization for a quick boost. Keep track of your progress with Credible's free credit monitoring.
- Get preapproved through multiple lenders. Different personal loan 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 on an online loan marketplace like Credible, which lets you compare rates from multiple lenders at once without affecting your credit score.
Building 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 hurting your credit. But be cautious not to overuse your credit cards while you're paying off your personal loan. It can be tempting to run up your credit card balance again, but doing so can leave you in the same situation you were in before, or worse.
Creating a budget and sticking to it can keep your spending in check. Building an emergency fund can ensure you don't need to rely on credit cards when an unexpected expense arises. And monitoring your credit score can help you keep track of your personal finance goals.
You can shop around for a variety of financial products on Credible, from debt consolidation loans to high-yield savings accounts. Visit Credible's online financial marketplace to get started.
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