Is Using a Personal Loan to Pay Off Credit Card Debt a Good Idea?

According to the latest data released by the Federal Reserve, consumer credit increased by a record $38 billion in April 2022. The increase shows that as Americans also deal with record-high inflation, they are starting to lean on credit cards more. Revolving credit, which largely includes credit cards, totaled a record $1.103 trillion, inching about the old record of $1 trillion set prior to the pandemic.

The news is not all bad, considering that increased credit card balances mean increased consumer spending, which is important for the economy. Still, while credit cards are a convenient way to make daily purchases, they can become a real burden when the balances grow out of control, and you cannot repay them. There are many strategies people use to pay off credit card debt. One of those ways is by using a personal loan. So, is using a personal loan to pay off credit card debt a good idea?

How to Use a Personal Loan to Pay Off Credit Card Debt

Credit card debt is known as revolving debt because you can regularly pay it off, freeing up more credit for you to use. Personal loans are not a revolving type of debt. They are paid in one lump sum, which you can then use and repay over a certain period of time. When you use a personal loan to pay off a credit card, you are essentially using the loan to consolidate the credit card debt. Doing so has many benefits, but there are some drawbacks to consider, as well.

Benefits of Using a Personal Loan to Pay Off Credit Card Debt

Using a personal loan to repay credit card debt is a good option for some people, particularly if your current repayment plan is not working for you. The benefits of using a loan to pay off the debt are as follows:

• Better debt management: The average American carries four different credit cards. One of the biggest challenges that comes with having so much debt spread out across so many different cards is that it becomes difficult to manage. You will have to pay close attention to due dates, minimum amounts, and interest fees. If you miss a payment simply because you did not realize it had come due, it will damage your credit score. With a personal loan, you only have one form of debt to keep track of, making repayment much easier and possibly more affordable.
• Better interest rates: One of the biggest reasons people find it challenging to repay their credit card debt is because so much of their payment goes to interest rates. In August of 2021, the average interest rate on credit cards was 17.13 percent. Compare that with the average interest rate on personal loans of 9.39 percent and it is easy to see how much a personal loan could save you.
• Better credit score: You may also see your credit score improve when you use a personal loan to pay off credit cards. Thirty percent of your credit score is based on your utilization ratio, which refers to the amount of the available credit limit you are using. When you pay off credit card debt using a personal loan, you bring the balances on your cards down to zero, improving your utilization rate and your credit score as a whole. It is important that you do not use your cards to make purchases, and that you consistently make your personal loan payments.

Drawbacks of Using a Personal Loan to Pay Off Credit Card Debt

While there are many benefits you may realize when using a personal loan to pay off credit card debt, there are some potential drawbacks, as well. These include:

• You could incur more debt: It is not uncommon for people to use a personal loan to pay off their credit card debt, only to add back to the balances of the credit cards by using them. If this happens, you will not reduce your debt, you will only take on more. You will also increase your credit utilization rate, which will further damage your credit score.
• Fees are sometimes high: Not all lenders charge fees on personal loans, but many do. For example, personal loan origination fees are very common with this type of debt. When applying for a personal loan to repay your credit card debt, it is crucial that you read the fine print in the agreement so you are not unpleasantly surprised in the future.
• Saving money is not guaranteed: While it is true that the interest rates on personal loans are lower, on average than credit cards, this is not always the case. If you do not have a fairly high credit score, you could pay a higher interest rate on a personal loan than you are currently paying on your credit cards. Lenders will view you as a higher risk and so, they will charge more in interest to recoup any potential cost of giving you the loan.

How Much Can You Borrow on a Personal Loan?

The amount available to you using a personal loan will depend on many factors. These include the specific lender you are choosing, and your own credit score and financial situation. In 2020, the average balance of personal loans was $16,458. However, there are lenders that offer personal loans with balances as high as $100,000. It is extremely important to thoroughly research any lender you are considering using for a personal loan, so you know upfront how much you can expect to receive, and how much you can expect to pay for it.

Our Consumer Debt Defense Lawyers in Fort Lauderdale Can Advise You of Your Legal Options

If you are struggling with a high amount of debt, our Fort Lauderdale consumer debt defense lawyer can provide the legal advice you need. At Loan Lawyers, our seasoned attorneys can outline your options including negotiating the debt or defending against unfair claims for it. Call us now at (954) 523-4357 or contact us online to schedule a free consultation.