Despite our best efforts to cover our expenses, life sometimes throws us some curve balls, like house or car repairs, that cannot be postponed. In this case, building up a credit card balance is easy.
If you owe money on your credit cards, you may be wondering whether consolidating that debt through a personal loan is the right choice. And the answer? It could be.
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The benefits of personal loans
With a personal loan, you can borrow money for any reason. So if you have multiple credit card balances hanging over your head, it can make perfect sense to consolidate them with a personal loan.
In many cases, you will qualify for a lower interest rate on a personal loan than your credit cards on your debt. This is especially true if you have a good credit score. Hence, using a personal loan to pay off credit cards could make eliminating your debt cheaper.
As long as you make your personal loan payments on time, that loan shouldn’t affect your creditworthiness. On the other hand, too much credit card debt can Violate your creditworthiness.
One factor that goes into calculating your credit score is your credit exposure. This ratio measures the amount of available revolving credit that you are using in one go.
The higher this ratio, the more damage it can cause. But personal loan balances do not count towards this ratio as they are not considered a revolving line of credit. Rather, personal loans are installment loans that are repaid in fixed amounts over time. From a creditworthiness standpoint alone, a personal loan could be a smarter way to pay off debt.
The downside of personal loans
If you own a home and have a mortgage, you may remember that when you took out your loan, you had to raise a ton of money towards closing costs. Well, personal loans work similarly in that you generally pay the closing costs for the amount you borrow. These fees could eat up the savings you make by lowering the interest rate on your debt.
Additionally, if you have strong credit, it may be worth considering a balance carryover before using a personal loan to consolidate your credit card debt. With a balance transfer, you can transfer your existing credit card balances to a single card. Often times, this new card comes with an introductory APR of 0% to help you avoid piling interest on your debts for a period of time. So, if you think you can manage to pay off your debts before this introductory period is up, a balance transfer may be a better choice than a personal loan.
Finally, minimum credits are usually set for personal loans. If you don’t have that much credit card debt, taking out a personal loan may not make sense. In this case, a balance transfer may be a more suitable option.
The bottom line
Using a personal loan to pay off credit card debt is a reasonable practice. But before you go down this route, make sure that it is the right choice for you. In some cases, a balance transfer can actually be a more cost-effective way to pay off the accumulated debt.