Imagine this: Your friends text you, let’s go skiing! And you want to say yes. Who wouldn’t want to glide down a mountain and enjoy an apres ski in a cozy lodge? And no worries, you say, I’ll just put it on the card! Or this: Your best friend plans a destination wedding to France.
Of course you’re going to RSVP yes—you couldn’t miss out on witnessing such a momentous day. And hey, when you use your credit card you’ll earn a few rewards.
Or even this: Your little sister needs a dress for prom, and asks if you’ll cover the cost. It’s a once-in-a-lifetime experience, you think as you hand over your card.
It’s easy to say yes in the moment, offer up your credit card, and think about the cost later. But the shock and stress of looking at your credit card statement after a month of spending can be overwhelming. And when your spending goes unchecked or your balance doesn’t diminish, credit card debt can rack up quickly.
When used responsibly, credit cards can provide the opportunity to do things like build credit and earn rewards points or cash back that can be used for other purchases. When used with abandon, however, careless spending on credit cards can lead to debt—which may feel insurmountable.
It’s no secret that credit card debt is a problem that plagues many Americans. According to the Federal Reserve, consumer debt in 2019 exceeded $4 trillion , over $1 trillion of which is credit card debt.
Nearly 55% of Americans who have a credit card are in credit card debt. The average credit card balance during the first quarter of 2019 was $6,028 , according to Experian. That balance can grow quickly, considering that annual percentage rates (APRs) for credit cards can be quite high (the average APR has hovered around 17% for some time).
Common Ways to Deal with Credit Card Debt
If you’re currently dealing with or have dealt with credit card debt in the past, you know how hard it can be to dig yourself out of the hole. While it can feel like an impossible problem to solve, there are strategies and resources available which may put you on a path toward eliminating your credit card debt once and for all.
When taking action on your credit card debt, it is generally recommended to put a plan in place. There are plenty of strategies that are touted for their ability to help you crush debt. Creating a debt reduction plan might provide the structure you need to meet your goal of debt repayment.
For some, the avalanche method, which organizes debts based on interest rate so the debt with the highest interest rate is targeted first, may make the most sense. For others, the built in reward of the snowball method, which targets debts with the smallest amount first may be preferred.
Regardless of the method you choose, it’s considered best practice when using these programs to try and stick with the debt repayment plan you’ve developed unless you see a compelling reason to switch. It can also be an opportunity to check in with your spending to determine what habits have gotten you into debt. You may find you’ll need to make a few changes to your spending habits to truly eliminate credit card debt from your life.
Beyond aggressively making payments on your debt, there may be other strategies worth considering. For some, it may be helpful to find a way to consolidate your credit card debt into better repayment terms.
One option for this is to use a balance transfer credit card. In concept, these are pretty straightforward. Basically, you open a new no- or low-interest credit card and transfer the balance of your existing credit card to it. You’re then able to pay off your debt with a lower interest rate as long as the balance is repaid within the given timeframe.
This, in theory, could put you on the path to pay off your credit cards in a more timely manner because you may not face high interest payments. But the low interest rate on balance transfer credit cards is usually only offered for an introductory period, commonly anywhere between six and 18 months. After that period expires, the rates usually increase.
If you can pay off the balance transfer card before the low initial rate expires, it could be an avenue worth pursuing. However, balance transfers often come with a fee—usually 3% to 5% of the total amount you’re transferring.
If it’s a large debt, you may end up paying a hefty fee, which may make this option a less attractive method. Another option is borrowing a personal loan for credit card debt consolidation. While it may seem counterintuitive to take out a new debt to help get out of an old debt, it could be worth considering.
FAQs: Paying Off Credit Card Debt with an installment Loan
For some, paying off credit card debt with a personal loan (which is an installment loan) might be a helpful strategy for getting out of credit card debt. Here are some commonly asked questions about debt consolidation loans:
Why use a personal loan to pay off credit cards?
If you have a lot of high-interest credit cards, you can rack up debt much more quickly if you don’t pay off the entire monthly balance, which ultimately might hold you back from building a solid financial future.
Carrying a balance from month to month means you’re not only paying for the upfront cost of your purchases, you may also be paying a hefty fee in interest. On average, households with a revolving balance of credit card debt paid $1,141 in interest.
If you’re in this situation, using an unsecured personal loan to pay off credit card debt can be an avenue worth exploring.
Ways to use a loan to pay off credit card debt
Instead of owing money on multiple credit cards, some people take the total amount owed among all their cards, consolidate that debt into a single loan amount to pay off the credit cards. That is what’s known as an installment loan known as a personal loan.
By doing this, you would then start making payments toward one single personal loan instead of payments to multiple cards. The hope would be that the interest rate on the personal loans would be lower than any combined interest rates on any credit cards you might have.
Is using a personal loan to pay off credit cards the right option for you?
Whether consolidating your credit card debt through a personal loan is right for you is based on different factors.
For instance, what are the balances and terms on your current credit card debt vs the terms you could obtain on a new debt consolidation loan? Try utilizing a debt calculator to help you gather some estimated numbers. If you qualify for a lower interest rate, paying off credit debt with a personal loan has a number of potential advantages. For one thing, consolidating or refinancing debt can help simplify your payment plan, turning multiple bills into one.
Taking out a personal loan to pay off debt can be one way to take advantage of better financing terms such as lower interest rates, which could help save you money in the long run.
Benefits of Taking Out a Personal Loan to Pay Off Credit Cards
Debt consolidation loans can be particularly useful for consolidating debt on multiple credit cards that may have less than favorable terms, and it’s easy to see why. Debt consolidation loans can potentially help you streamline your finances. Making a lower fixed payment on a single loan every month may also help reduce the chances of missing payments.
It is worth noting that some credit card interest rates can vary based on factors such as the type of transaction, purchase, or cash advance, whether the rate is fixed or variable, qualifying criteria, and more.
According to Bankrate.com the average interest rate on a variable credit card is running around 17% and sometimes reaching as high as 29.9% APR if you miss payments. One tool to help you understand how much interest you might be paying is our Credit Card Interest Calculator.
Personal loans, on the other hand, can typically be found at a lower interest rate. A lower interest rate could potentially reduce the amount of interest the borrower is required to repay over the life of the loan.
Depending on your circumstances, a percentage point or two off could make enough of an impact on your interest payments to place you on the path to paying off your credit cards in a more timely manner.
When you take out a personal loan it can be used for almost anything that’s a personal expense, such as general consumer/household purpose, home renovations, and debt consolidation; theoretically, you could use a personal loan to pay for anything from a wedding to an elephant (although good luck finding a low APR on that one).
Potential Considerations Before Taking Out a Loan to Consolidate Credit Card Debt
When considering a personal loan, one way to start could be by making a chart of your debts and their respective interest rates, and calculate how long it could take you to become debt-free.
Also, consider whether you have explored all options in determining how best to position your outstanding debt into better financing terms.
Once you’ve done the initial legwork, a good next step is to compare that credit card repayment plan with a personal loan, and see which is better for your budget.
Check the math and review the loan terms and interest rate to confirm you’d actually end up with a preferable repayment plan. For instance, a lower monthly payment might seem great, but if it ultimately extends the length of your repayment, depending on the rate and term, you might end up paying more in interest than you realize.
Consider your current and future financing terms: whether it’s simply peace of mind in the form of one monthly bill, or saving the maximum amount of money, what works best for one person may not be great for you. If you’re still in doubt about how to best get ahead of your debt, consider asking for help from a professional.
Those professionals could offer some valuable insight to help you create a personalized plan that can help you find the best path toward your financial goals, like living in a debt-free future.
Taking an intentional step toward tackling your debt can be challenging, but with a little creativity and discipline, you can work on managing your debt without letting it slow your financial plans for the future.
With SoFi, you may qualify to consolidate your high interest debt into one single unsecured personal loan, with loan amounts up to $100,000 and fixed interest rates with no origination fees or prepayment penalties.
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