Are you one of the 191 million Americans with credit card debt? If so, debt consolidation might be the right choice for you. A debt consolidation loan is a personal loan used to pay off high-interest debt. It’s a simplified way to combine multiple credit card balances into one single payment. Here’s what you should know about credit card debt consolidation and if it’s the right move for your financial future.
What We'll Cover
Pros and Cons of Personal Loans for Credit Card Debt Consolidation
Personal loans are a common way to help pay off accumulated debt. Whether from a bank, credit union, or another lender, the application process for personal loans is usually simple and often includes flexible terms and hassle-free repayment. However, depending on your situation, there are times when using a personal loan is better than others. Here’s what you should know.
When It’s a Good Option and the Benefits of Using a Personal Loan to Consolidate
You Might Qualify for a Lower Interest Rate. Currently, the average credit card interest rate sits at 16.14%. However, on a brighter note, the average personal loan interest rate is around 9.34%. Interest rates are determined by many factors, including credit score, employment, and debt to income ratio. That means with a personal loan it’s possible to get an even lower interest rate than the average, practically cutting your payment in half and repaying your debt faster.
One Easy Payment. If you have multiple credit cards, you know the struggle of keeping track of due dates and minimum amounts. If you inadvertently miss one of those, you’ll suffer through late fees and a potential drop in your credit score. Using a personal loan to consolidate your debt helps streamline the monthly bill barrage. Instead of multiple payments to several outlets, you’ll make one payment on your personal loan, reducing the chance for error and saving you time.
Payoff Debt Sooner With a Repayment Plan. One of the dangers of credit cards is that you can accumulate large amounts of debt without having a repayment plan in place. Continually adding purchases to your card while only paying the minimum keeps you in the vicious debt cycle. However, using a personal loan to pay off that debt includes set repayment terms, and faithfully following that repayment schedule will allow you to pay it off quicker than just meeting the bare minimum.
- There’s Potential to Boost Your Credit Score. Having a solid credit score is necessary for many of life’s big purchases. From a new house to a new car, a high credit score can help you secure a loan with a favorable interest rate. However, carrying large amounts of debt, missing payments, or making late ones can drop your score. Using a personal loan to consolidate debt might help increase it, and here’s why. First of all, a personal loan adds variety to your credit mix, something that affects your score. Carrying different types of debt shows creditors you’re responsible with money. The obvious reason your score could increase is that your credit card is paid off. Keeping a low credit utilization ratio, meaning the credit you’re using versus what’s available to you, helps improve credit scores.
Drawbacks and Reasons Debt Consolidation Might Not Work For You
As good as it sounds to get a personal loan to pay off credit card debt, it’s not always the best idea. Here are a few reasons debt consolidation might not work for your lifestyle.
- You Could End Up Accumulating More Debt. Taking out a personal loan to help pay off existing credit card debt can help many borrowers. However, if you continue to use your credit card and rack up even more debt while you’re paying your personal loan, your financial situation will become even worse than when you started. It’s best to address potential spending issues before applying for a personal loan. Getting bad habits under control will ensure your financial success.
- You Might Not Get a Lower Interest Rate. While personal loans typically have lower interest rates, that doesn’t mean you’ll qualify for it. If your credit is poor, you might not meet the standards for a personal loan, and if you do, the interest rate might not be the lower one you’re expecting. Many lenders allow you to prequalify for a personal loan before you submit an actual application. This is helpful if you have a poor credit history and aren’t sure if a personal loan is in your favor.
- You Have Minimal Debt. If you can pay off your existing credit card debt within the next few months, applying for a personal loan probably isn’t worth the time and effort. Instead, make a plan of action to pay down your credit card as quickly as possible and find a way to keep your spending in check.
Choosing a Personal Loan
Once you’ve decided a personal loan is your best option, the next step is figuring out how to get one. Many lenders on the market today offer a wide variety of options. Here’s what to consider.
- Interest rates
- Repayment terms
- Loan amount
Websites like LendingTree allow potential customers to search an online marketplace and comparison shop for their loans. Such a marketplace allows businesses to compete for their customers by offering low-interest rates and favorable terms. Since there isn’t one set standard for most personal loans, seeing the different options based on your own credit score, loan amount, and loan purpose make the process less stressful and easier to manage.
While the interest rate is based upon your credit score, keep in mind that many lenders offer both variable and fixed rates, something you’ll need to consider when comparison shopping.
LendingTree personal loans allow you to find lenders that provide loans from $1,000 to $50,000 with competitive interest rates and other favorable repayment terms. If you’re looking for a personal loan for credit card debt consolidation, having a variety of choices in one stop makes achieving your financial goals much easier.