Paying Off Credit Card Debt with a Personal Loan

People talk all day long about their workouts, favorite apps, and their love lives, but bring up the subject of money, especially credit card debt, and suddenly everyone clams up.

But just because we don’t talk about debt doesn’t mean it’s not an issue. After all, the average American household carrying a credit card balance has over $9,300 in credit card debt as of March, 2020. And it can cause a great deal of stress.

In fact, according to the American Psychological Association’s latest “Stress In America” report , money is the number two cause of stress—ahead of family and health concerns—and second only to work. Over 50% of Americans with debt who were surveyed in a 2017 American Institute of Certified Public Accountants poll said it had negatively affected their lives.

If you’re a Millennial, the same poll found that you might be twice as likely to worry about debt than Baby Boomers. While the poll found that 56% of people with debt said that it had a negative effect, that figure jumps to almost seven in 10 for Millennials. The study also found that Boomers and Millennials are equally likely to have debt.

So unless you’re expecting a windfall from a long-lost relative (who probably didn’t talk about money either), it’s likely up to you to come up with a game plan to manage your finances.

But how do you pay off credit card debt? There are many methods to choose from—here are just a few.

Budgeting Debt Payoff

Before embarking on paying off credit card debt, a good first step might be putting together a budget—which can help you better manage your spending.

There are simple options like an online spreadsheet and more advanced ones like pay services to track your spending. And you might even find money in your budget to put towards that outstanding debt.

If you’ve got more than one type of debt, say a mortgage, student loan, and maybe a car loan, you may want to think strategically about how you’re going to tackle them.

Some finance gurus recommend taking on the most expensive debt first—then the debt with the highest balance. Another approach is to pay off the smallest debts first, meaning the debts with the smallest balances.

Then you can take next month’s debt-paying money and funnel it into the next smallest balance. This method gives you some small wins early and over time can give you some room to make larger payments on some of your other outstanding debts. (Of course, for either of these strategies, keeping current on payments for all debts is essential.)

Refinancing or Consolidating

Refinancing or consolidating debt are other strategies, especially for those in the post-grad plateau—the early stages of a promising career—if, for example, there’s a raise waiting just around the corner. In simple terms, refinancing is taking one loan or line of credit and replacing it with another (for instance, balance transfers). Consolidating is similar to refinancing, as it combines all your debt into one loan that you then have to pay off.

There are lots of reasons to consider refinancing. You may want to lower your monthly payment. Maybe you want to pay over a different period of time. Or maybe you just want to work with a new lender or loan servicer.

With fixed-rate credit cards becoming more difficult to find, and the average annual percentage rate (APR) for variable-rate credit cards hovering around 17%, you could potentially save by refinancing credit card debt (depending on how much you owe, of course) with a credit card consolidation personal loan—which, as of late 2019, had an average rate of 9.41%.

Fortunately, applying online typically doesn’t take more than a few minutes. And there are more options than ever with innovative fintech startups doing what they can to make the process of refinancing your credit card debt, quick and easy.

Again, there’s also the potential for saving. Of course, everyone’s situation varies, but you can use SoFi’s credit card interest calculator and personal loan calculator to do the math on your own.

So You’ve Decided to Apply for a Personal Loan. Now What?

The steps for paying off a credit card with an unsecured personal loan aren’t particularly complicated, but having a plan in place is important.

1. Getting the whole picture.

It can be scary, but getting the hard numbers—how much debt you have overall, how much you owe on each specific card, and what the respective interest rates are—gives you a sense of how big of a personal loan you’re aiming for.

2. Searching personal loan options.

These days, you can do most—or all—of your personal loan research online. What you’re looking for is a personal loan with an interest rate lower than what you’re currently paying on your cards. You’ll also want to keep an eye out for origination fees, which can cost you more and could throw off your payoff plan.

3. Paying off the debt.

Once you’ve chosen, applied, and qualified for your personal loan, you’ll likely want to immediately take that money and pay off your credit card debt in full.

The process of receiving the personal loan may differ; some lenders will pay off your credit card companies directly, others will send you a check that you’ll then have to deposit and use to pay off your credit cards yourself.

4. Hiding those credit cards.

One potential risk of using a personal loan to pay off your credit cards is that it makes it easier to accumulate more debt—after all, a $0 balance on a credit card can be a temptation. The purpose of using a personal loan to pay off your credit card debt is to keep yourself from repeating the cycle.

If possible, you can take steps like hiding your credit cards in a drawer and trying to use them as little as possible. This is where creating a budget comes in handy!

5. Paying off your personal loan.

A benefit of using a personal loan to consolidate your credit card debt is that you only have one monthly payment to worry about—instead of several. You’ll want to make sure you don’t miss any of those payments, so you may want to set up a monthly reminder or alert.

More Details About Personal Loans

So why would you consolidate credit card debt with a personal loan?

Most unsecured personal loans come with a fixed APR. A fixed APR is a rate that won’t fluctuate or change based on an index.

This doesn’t mean that your rate will never change over the life of your loan (for example, it could change if you missed several payments). But if it does remain the same, it means you’ll be paying the same amount monthly over the life of the loan.

Another pro is the ease of online applications and access to live customer support from many lenders. With online applications, the process for getting a personal loan can be quick and easy, and you don’t have to trudge to a post office or send certified mail or print out complicated tax documents. You also may be able to access live customer support to help you out with any questions.

Another possible benefit is pausing your payments in case of certain situations. Your loan(s) will typically have to be in good standing to be eligible for this benefit (among other requirements), but if you lose your job some lenders, like SoFi, may temporarily pause your payments and help you find a new job. (Note that interest accrues during the forbearance period and is added to principal when you resume repayment.)

SoFi’s Unemployment Protection Program is offered in three-month increments that can be renewed up to a maximum of 12 months over the life of the loan.

Borrowers looking to apply for this benefit may be eligible if they are (among other qualifications): a current SoFi member, have an eligible loan that is in good standing, certify that they have lost their job through no fault of their own (involuntarily), and actively work with Career Services to look for new employment.

Finally, there’s also the benefit of ending the vicious cycle of credit card debt, without resorting to a balance transfer card.

You may be among the 49% of Americans who know that balance transfer credit cards exist. Balance transfer credit cards are just credit cards that usually have an introductory offer of some sort to give you a lower rate (or a 0% rate) if you transfer your balance to the new card.

This might seem like an appealing offer. But if you don’t pay off the balance before the enticing offer is up, you could end up paying an even higher interest rate than you started with. You also may have to pay a transfer fee to the new cardholder.

Planning Debt Reduction

Armed with new information and a debt reduction plan, the next time the subject of money—specifically credit card debt—comes up, you’ll have plenty to talk about. You could now be able to confidently discuss APRs on personal loans compared to credit cards, the merits of no fees, and the plusses of a fast and easy user interface for a loan application.

And if you share this article with friends who want to cut up a few of their credit cards, they can join the conversation, too. Because chances are, based on the numbers, some of those friends might be among the 55% of Americans with credit cards who are also carrying other debt.

Maybe they’re as shy about their debt as you used to be and could use some handy advice from a friend or a solid five reasons why a personal loan might be worth investigating.

Remember, however, personal loans aren’t for everyone. While they typically have lower interest rates than credit cards, they are still debt and should be considered carefully and used responsibly.

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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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