Credit Score

Should you take out a personal loan to pay off your credit card debt?


Image source: Getty Images

Despite our best efforts to cover our expenses, sometimes life throws the curveballs at us, like home or car repairs that can’t be delayed. When this happens, it’s pretty easy to build up a credit card balance.

If you owe money on your credit cards, you might be wondering if consolidating that debt through a personal loan is the right choice. And the answer? It might be.

The advantage of personal loans

A personal loan allows you to borrow money for any reason. So if you have multiple credit card balances hanging over your head, consolidating them with a personal loan could make a lot of sense.

In many cases, you will be entitled to a lower interest rate on a personal loan than your credit cards charge you on your debt. This is especially true if you have a high credit score. As such, using a personal loan to pay off credit cards could make your debt cheaper to eliminate.

Plus, as long as you make your personal loan payments on time, having that loan shouldn’t hurt your credit score. On the other hand, having too much credit card debt can hurt your credit score.

One factor that goes into calculating your credit score is your credit utilization rate. This ratio measures the amount of available revolving credit you are using at one time.

The higher this ratio, the more damage it can cause. But personal loan balances are not factored into this ratio because they are not considered a revolving line of credit. Rather, personal loans are installment loans that are repaid in fixed amounts over time. So, from a credit score standpoint alone, a personal loan might be a smarter way to pay off debt.

The downside to personal loans

If you are a homeowner and have a mortgage, you might remember that when you closed your loan you had to find a pile of cash for closing costs. Well, personal loans work the same way in that you will usually pay the closing costs on the amount you borrow. These charges could reduce your savings by lowering the interest rate on your debt.

Additionally, if you have good credit, it might be beneficial to consider a balance transfer before consolidating your credit card debt with a personal loan. A balance transfer allows you to transfer your existing credit card balances to a single card. Often times, this new card will come with an introductory 0% APR which will help you avoid accumulating interest on your debt for a period of time. So, if you think you will be successful in paying off your debt before this introductory period expires, a balance transfer may be a better bet than a personal loan.

Finally, personal loans generally impose borrowing minimums. If you don’t have that much credit card debt, it might not be a good idea to take out a personal loan. In this case, a balance transfer may be a more suitable option to explore.

The bottom line

Using a personal loan to pay off credit card debt is a reasonable step. But before you embark on this path, make sure it’s the right choice for you. In some cases, a balance transfer might actually prove to be a more cost effective way to pay off the debt you’ve accumulated.

The best credit card erases interest
If you have credit card debt, transferring it to this top balance transfer card can pay you 0% interest for 18 months! This is one of the reasons our experts rank this card among the best to help you get your debt under control. This will allow you to pay 0% interest on balance transfers and new purchases during the promotional period, and you will not pay any annual fees. Read our full review for free and apply in just two minutes. We strongly believe in the Golden Rule, which is why the editorial opinions are our own and have not been previously reviewed, endorsed or endorsed by the advertisers included. The Ascent does not cover all the offers on the market. The editorial content of The Ascent is separate from the editorial content of The Motley Fool and is created by a different team of analysts. Ally is an advertising partner of The Ascent, a Motley Fool company. Maurie Backman does not have a position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


Leave a Reply

Your email address will not be published.