Can I use a personal loan to pay off a credit card?
Paying off debt on a credit card with a high interest rate can seem endless at times, especially if a good chunk of your repayments are absorbed by interest charges and don’t reduce the balance owing much.
Minimizing those interest charges by lowering your interest rate could give you a chance to get out of it once and for all.
Since personal loans generally offer lower interest rates than credit cards, you may be wondering if you could take out a personal loan to pay off a credit card.
Fortunately, you can. And besides a lower interest rate, there are other ways a personal loan could help you pay off your debt.
How could a personal loan help me minimize my debt?
Using a personal loan to pay off your credit card won’t erase your debt for you. But there are ways to make managing your debt easier, including the following:
1. A personal loan repayment schedule has a final finish line
A credit card is a form of revolving debt that allows you to spend and make repayments the way you want, as long as you meet your minimum repayments each month. This means that unless you completely stop using your card and start focusing on paying off the balance, you could find yourself paying it off indefinitely.
In comparison, a personal loan is a type of installment debt whereby a one-time lump sum is paid to the borrower, who is then responsible for repaying it (plus interest charges) in predetermined monthly installments for a specified period. This forces the borrower to bring his debt under control by actively repaying it before the end of the loan term.
An added benefit of paying off your debt within a specified timeframe is that you will likely also minimize the total amount of interest you will pay.
2. A personal loan will not allow you to add to an existing debt
As long as you close your credit card account after you’ve used your personal loan to pay it off, you won’t be tempted to make unnecessary purchases and add to your existing debt. Often times, it’s these types of purchases that can make it seem like it’s impossible to reduce your debt.
3. The lump sum repayments of a personal loan can be automated
When your credit card bill arrives each month, you are responsible for making at least the minimum payment amount by the due date shown on the bill. To some extent, it depends on your memory, which makes it quite easy for you to forget about it and end up with late fees and a negative event on your credit report. Unless of course you set up a system to remind you each month.
Personal loan repayments, on the other hand, can be automated, so the amount owing comes straight out of your account each month. It can also be easier to budget, as payments are usually the same amount each month. Remember that if your personal loan is at a variable rate, you will need to provide a small supplement in the event of an increase in interest rates.
What other options should I consider?
Before you jump into your personal loan comparison, it’s worth considering your other options.
A balance transfer credit card
A balance transfer is the process of transferring your existing credit card balance to a new card that offers an interest-free period on the transferred amount. If you’re confident that you can pay off the balance before the interest-free period is over, a balance transfer credit card might give you the wiggle room you need.
But keep in mind that after the interest-free period is over, you will need to start paying interest on the total remaining balance. In addition, the interest-free period does not apply to additional purchases you make with your new card. So if you are going for a balance transfer, it is a good idea to have a solid plan in place.
Lower your credit limit
If you’ve been successful in paying off your credit card and you are over your limit, you might consider asking your credit provider to lower your credit limit, so you won’t be tempted to use it. to make more purchases.
Talk to a financial advisor
Remember, if you find yourself in a spiral of debt that you are having trouble getting out of, there is help. You can access free financial advice by contacting the National Debt Helpline.