Should You Use a Personal Loan to Pay Off Credit Card Debt?
Credit card debt is a huge problem for many Americans. According to Studenloanhero.com, the average household has $6,662 dollars in credit card debt and most have even more student debt on top of that…those numbers can be staggering and very frightening.
While your student loan debt may have the higher balance, credit card debt can pose an even larger threat to your financial health. Due to interest rates, minimum payments and the fact that many continue to add on to their credit card debt while trying to pay it off.
A “credit card consolidation loan” is a personal loan which is used to pay off credit card debt. These loans give people a defined repayment plan so they know exactly when they will be debt free- something which can be helpful for those who are financial procrastinators or who have trouble keeping track of what their balances are. These types of loans also help you keep track of how much interest you will definitely end up paying- that can fluctuate if you end up paying off your cards one by one depending on the varying interest rates and how much you pay each month.
Credit card consolidation loans work best for those who have high-interest rates on multiple credit card accounts.The benefit of this kind of loan is potentially lower interest rates. Depending on your credit score, you may get a lower interest rate on your personal loan than the various rates of your different credit cards. You also would only have to worry about a single monthly payment versus 2,3,5 however many credit cards you have to pay off. That means one payment, one bill, one day you have to remember making it easier to track and budget for. You also will pay off your debts quicker since your loan has a finite lifespan whereas your credit cards don’t.
You are not guaranteed a lower interest rate. Depending on your interest rate and which loan provider you choose the lender may only offer interest rates which can reach as high as 35% APR. Consolidating your debt into one payment also may not work with your budget. Depending on what your monthly payment is, you may have to cut out certain parts of your budget which could put a large strain on you financially.
The ultimate goal is to get out of debt. so if you find you may have to use credit cards, even more, to help pay for things you need to budget for such as groceries, then consolidating your debt may not be for you. Some loan companies may also charge what’s called an “origination fee,” which is a fee used to process a loan application and the agreement. The fee can be anywhere from 1-6% of your loan amount, so it may not be worth paying or you may not be able to afford it.
Before you decide to consolidate your loan, it is important to consult a professional about your various loan options and have them calculate the amount of interest you will have to pay for each option. At the end of the day, the goal is to get out of debt as quickly as you can but without putting a strain on your everyday finances. It can be a tricky balance, but becoming debt free is certainly easier than you think.
Have tremendous credit card debt? Are you considering using a credit card consolidation loan? Leave a comment below or give us a call today!