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If your credit card debt has ballooned out of control, you've got plenty of options. Many people, when faced with high interest credit card debt, choose to pay it off with a lower interest personal loan.
To decide whether to get a personal loan to pay off credit card debt, consider what rate and terms you'll qualify for on the new loan—and take the course of action that will help you make all debt payments on time. That will safeguard your credit score.
Depending on your credit, you may be eligible for a personal loan—also known as a debt consolidation loan—at a lower interest rate than what your current credit card debt carries. In the best-case scenario, a debt consolidation loan can help you more quickly pay off credit card debt and save you money.
But if you don't qualify for a lower rate, or opting for a personal loan would extend your repayment term, you may be better off doing something else. Here's how to decide.
Is Personal Loan Debt Better Than Credit Card Debt?
Personal loans and credit cards can impact your credit score positively if you make payments on time—and negatively if you don't. When you use credit cards, it's best to keep your total balance below 30% of your total credit limit, and the lower the better. Maintaining low balances will reduce your credit utilization ratio, which is the second most important factor in your credit score after payment history.
But there are some significant differences between personal loans and credit card debt. Personal loans are a type of installment debt, which means you'll make the same size payment each month without the flexibility to pay less. Personal loans also often come with origination fees, but their interest rates may be lower than what you'd receive on credit cards.
By contrast, credit card debt is revolving debt. You can carry a balance and make smaller monthly payments as your budget dictates, as long as you pay the minimum your issuer requires each month. But credit cards charge late fees and, potentially, annual fees, along with higher interest rates than most personal loans. Plus, they may encourage you to spend more, knowing you have a credit limit you can charge up to.
Is It a Good Idea to Pay Off Credit Card Debt With a Personal Loan?
If you're struggling to afford credit card payments, taking out a personal loan with a lower interest rate and using it to pay off the credit card balance in full may be a good option.
A debt consolidation loan with a low interest rate could mean owing less per month, which can help you make loan payments on time. A lower interest rate may also leave you with more money to put toward the loan balance, allowing you to pay it off earlier.
But before you use a personal loan to pay off credit card debt, consider not only the interest rate you receive, but also the repayment term lenders offer. Choosing a longer repayment term than you would have needed to pay off the original credit card debt could cost you more in interest. If a longer repayment term helps you afford to repay the debt, though, it could protect your credit from the effect of missed payments, making the choice worthwhile.
How to Pay Off Credit Card Debt Without a Personal Loan
There are lots of other ways to pay off credit card debt if a personal loan isn't an option for you. Balance transfer credit cards allow you to move your credit card balance to a card with 0% APR for a period of time. This is a solid choice if you have good or excellent credit, which you'll need for a balance transfer card with favorable terms, and you're able to pay off the debt during the interest-free period.
You may also choose to send any extra money you earn or save to certain debts to get rid of them, starting with your smallest balance or highest-rate debt. Paying off your smallest debts first, known as the debt snowball method, won't save you as much money as the debt avalanche, during which you'll pay off balances with the highest interest rates first. But the ideal method for your situation is the one that will encourage you to keep going and get your balances down to zero.
You might also consider working with a certified credit counselor at a nonprofit credit counseling agency. A credit counselor can provide a free evaluation of your debt and offer suggestions for paying it off, taking into account your budget, debt balances and other financial goals.
One additional consideration: As compelling as it may be, it's best not to close the account when your credit card balance is paid off. Closing a credit card account reduces your overall available credit and, if you have a balance on other cards, will increase your credit utilization ratio and have a negative effect on your credit scores.
On the other hand, if keeping the account open tempts you keep charging to it, then closing it may be your best bet.
Life After Credit Card Debt
Whether or not you close the credit card you've paid off, it's now up to you to be diligent about credit usage in the future. It's important going forward to avoid using credit to spend more than you can comfortably pay back.
Once you've paid off your credit card debt—with a personal loan or another debt reduction tool—your goal should be to pay off any balances on your credit cards in full each month. That helps you avoid spending money on interest, and builds a track record of wise credit usage. After all, when you stay out of debt, and keep your credit score in good shape, you'll have access to financial tools that will help you meet goals that matter to you in the future.