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- In some cases, a personal loan can help you save money on interest while paying off credit card debt. But knowing exactly how to use a personal loan to pay off your credit cards is important so you don’t end up paying more in the long run.
- If you can refinance credit card debt at a lower rate, you can save money.
- Some online personal loans are approved instantly and can send you funds as soon as the same day, though most take a few days to approve and transfer funds to your account.
- Visit Business Insider’s homepage for more stories.
According to the Federal Reserve, 41.2% of American households have credit card debt totaling over $1 trillion. If you are currently dealing with credit card debt and want to pay it off for good, a personal loan might make sense.
If you decide to use a personal loan to pay off credit cards, it’s important to avoid the spending that got you into debt in the first place. Once you get yourself on a working budget, follow these steps to use a personal loan to pay off your credit cards.
How to use a personal loan to pay off your credit cards
1. Review your current debts and interest rates
The first thing you need when working on any payoff plan is a good list of all of your debts. Create a list of every credit card you have with its balance, interest rate, and minimum monthly payment if you don’t already have one. This tells you what you need to pay off, the total minimum payments you have each month, total balances across all cards, and other useful information you’ll need later on.
If you want to pay off your debt the old-fashioned way, by making payments on the credit cards, you can use this list to create a debt snowball or debt avalanche plan. But if you want to consolidate all of those credit cards with a personal loan, you need the same information readily available.
2. Look for balance transfer options at a lower rate
When paying off one loan with another, there is one hard rule you should never break. Only transfer a balance to a loan or credit card with a lower interest rate. As long as you do that, you should end up saving money in the long run. If you move to a loan with a higher interest rate, you’ll end up paying more.
There are many places you can find a personal loan. A new crop of online lenders makes this type of loan very fast and easy. You can also look to peer-to-peer lending marketplaces to get your loan funded by a group of investors. If that new loan has a lower interest rate than your credit cards, you should think about moving forward with the consolidation.
3. Pay off your old cards with loan proceeds
When you are approved for your loan, you might get the proceeds as a check or lump cash deposit in your bank account. Don’t let that big number tempt you to spend on anything other than your credit card payoff. Otherwise, you are just putting yourself in more debt that you’ll still have to pay off later.
As soon as the funds clear, pay off every single credit card in full. Use your bank’s online bill pay, send a check, or pay at your credit card website. It doesn’t matter how you do it as long as you pay them off quickly to stop new interest charges. Once paid off, put your cards in the back of a drawer so you’re not tempted to overspend on them again.
4. Put yourself on a debt freedom schedule
This type of debt consolidation has three major benefits:
- Only one monthly payment instead of several
- Lower interest costs
- Debt freedom date locked in
Once you pay off your loan, you may find yourself completely debt free. If you have any student loans, auto loans, or mortgage loans, at least your highest interest debt should be taken care of. Take this opportunity to avoid getting back into any new debt in the future.
A personal loan typically comes with a fixed monthly payment for a certain period of time. If every payment is made on time for the life of the loan, the balance will be zero at the end and you won’t have any credit card debt leftover to worry about.
5. Conquer your debt for good
When you have monthly debt payments, you don’t have a choice about what to use that money for. Every payday, a chunk of your income is already spoken for. When you pay off those debts, you can choose if you want to use that money to save, invest, or for something else.
Consolidating your credit card debt to a personal loan does not always make sense, but if you can find a lower interest rate and put yourself on a debt freedom plan, it can be a great idea. When you can save money and get out of debt sooner with a personal loan, you should seriously think about going for it.
Ready to take out a personal loan? Consider these offers from our partners:
Related coverage from How to Do Everything: Money
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How to pay off debt fast: Make more than the minimum payment
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How to consolidate credit card debt to streamline your monthly payments
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How to calculate credit card interest to figure out how much you owe
See Also:
- A team of financial experts analyzed hundreds of retirement strategies to find the best one for middle-class Americans, and the winner hinges on 2 crucial decisions
- I nicknamed my 6 high-yield savings accounts to help me spend less, save more, and buy the things I care about most
- If you have credit-card debt, the first step toward saving for retirement is clear, according to one financial planner
Source: Business Insider – ehoffman@businessinsider.com (Eric Rosenberg)