Credit card debt can be a big roadblock on the path to financial wellness. If you have multiple credit card balances to pay each month, you’ll likely find yourself searching for a way to manage them. Using a personal loan to pay off credit card debt is a smart way to rid yourself of those high interest rates.
Let’s Talk Credit Card Debt
What’s so wrong with credit card debt? Why would you want to exchange credit card debt for loan debt? Isn’t that just trading one payment for another payment? It’s still money going out of your account each month, so why does it matter?
If you have these questions, congrats. Asking these questions is the first step to understanding the difference between staying in a credit card debt cycle and using a personal loan to do away with the debt altogether. Let’s get into it.
Revolving Credit vs. Installment Credit
When it comes to credit repayment, there are two basic types: revolving credit and installment credit.
With revolving credit, a borrower is given a set credit limit by a lender. The borrower may spend the borrowed amount – whether in part or in full – then pay it back, spend it again, and on and on. The benefits of this credit model might be obvious: a seemingly endless well of credit.
The disadvantages of revolving credit take a little more insight, though. When you consider the variable interest rates of revolving credit and the impulse to keep spending on the borrowed amount, you can easily get stuck in a credit cycle – and end up paying far more in interest than you first anticipated upon opening the account. When you have multiple revolving credit accounts, that interest adds up and damages your budget (and sometimes, your credit score).
Installment credit works like this: a borrower is approved by a lender for a set amount and borrows it all at once, repaying with pre-set, scheduled payments. The borrower spends their borrowed money as if it’s cash and repays the loan steadily over time, ending in the full repayment of the loan.
With installment credit, the advantage to your credit (and your personal finances) is huge. There is a set end date to the loan, a light at the end of the tunnel and a goal to work toward.
What does this mean for your credit card debt? If you use a personal loan to pay off credit card debt, the end is very much in sight.
Why Personal Loans?
There are big advantages to using a personal loan to pay off credit card debt. Let’s take a look at some of the big ones:
- Pay off those credit cards
This one might go without saying but getting those credit card payments off your plate can improve your budget as well as your credit score. Even though a personal loan is still debt, paying off the cards can give your credit an immediate boost while you exchange its payments for a more consolidated one.
- Better rates
Unlike credit cards with high APR and variable rates, most personal loans come with a fixed rate, which means you keep the same rate for the life of the loan. With a consistent and relatively lower rate, you can easily predict monthly payments and stand a good chance of paying off your loan on time.
Compare the stability and consistency of personal loans to the high and unsteady rates of your credit cards. It’s easy to see how using a personal loan to pay off credit card debt is a smart option in the long run.
- One monthly payment
If you pay off multiple credit cards with one personal loan, the switch to one payment a month will be a relief. It’s easier to plan for and follow through with one payment than to scramble and scrounge for several. Plus, with lenders like World, there’s no penalty for paying off a loan faster.
- Impact on credit
Another advantage to using a personal loan to pay off credit card debt is the overall impact on your credit score. With on-time payments made consistently, you can improve your credit, winning you far better rates on future loans, credit cards, and purchases.
Credit Cards vs. Personal Loans
Like we mentioned earlier, a personal loan is still a form of debt. You might ask yourself, “is it really worth it just to trade one form of debt for another?” It’s a smart and understandable question. Let’s look at the real differences between the two:
| Credit Card | Personal Loan | |
| Rates | Variable rates are common with credit cards. The rate can change – sometimes drastically – over the life of the loan. | Some loans come with fixed rates, which keeps both the rate and payment the same throughout the life of the loan. |
| Payments | Variable. If you’re running a balance across multiple cards, you’ll be forced to juggle multiple due dates and amounts throughout the month. | Fixed. By consolidating debt across multiple cards with a personal loan, you’ll make one fixed monthly payment. Simple and streamlined. |
| Credit Impact | Miss even one payment and you run the risk of late fees, penalties and a hit to your credit score. Running a balance on your cards also impacts your credit utilization, which impacts your overall credit rating. | At World, we report to credit bureaus. Over time, your World loan can boost your credit score while documenting your continued history of responsible borrowing. |
Tips For Using A Personal Loan to Pay Off Credit Card Debt
If you’re thinking about using a personal loan to pay off credit card debt, here are some tips:
- Pay off your credit cards right away.
After you apply and are approved for a personal loan, your loan funds will most likely be deposited into your bank account. If your intention is to pay off credit card debt, it’s important to do it right away, so your loan funds aren’t spent on anything else.
- Make consistent, on-time payments on your loan.
Not only will this steadily distance you from that original debt, it will also boost your credit in the process. And if you want to pay it off early, World Finance offers zero penalties for early repayment.
If you’re looking for ways to improve your monthly budget, rid yourself of the high interest rates of credit cards, or simplify your finances, a personal loan is a smart way to consolidate your credit card debt.