Should I use a loan to pay off credit card debt?

Advantages and disadvantages of loans

Before you decide to use a personal loan to get rid of your credit card balance, take a look at this overview of the pros and cons.

Advantages:

  • Relatively easy to apply. If you are serious about taking out a personal loan for credit card consolidation, lenders make it easy to apply, often online.
  • the best debt consolidation loans can make your life easier. If a bill sometimes slips your mind because you’re struggling to stay organized, a personal loan can simplify paying the bill by giving you just one debt payment per month.
  • Saves you money when the interest rate is lower. If you search for personal lenders, you’ll likely find one that offers a lower rate than your current debt. This way you will save money over the term of the debt consolidation loan.
  • You know what you’re getting into. There is nothing unpredictable about the best personal loans. The day you sign the loan documents, you know how much your payment will be, when it’s due, and when it’ll be paid in full.
  • Builds your credit score and expands your credit history. If you’re just starting out (or rebuilding your credit), a personal loan is a stable way to establish a steady payment history.

The inconvenients:

  • Does not address underlying issues. A personal loan can cure your immediate problems through debt consolidation, but it won’t cure your spending habits. If you have credit card problems due to bad habits, you need to fix them, whether or not you take out a debt consolidation loan.
  • The interest rate can be as high (or higher) than your credit card rate. Although you don’t need excellent credit to qualify for a credit card consolidation loan, if you have bad credit, you may not qualify for a rate lower than the rate paid on your credit cards.

Pro tip: If you’re struggling with overspending, a credit counselor can help. Talk to one before you decide to take out a loan, in case there are better options that can help you move towards financial freedom.

What are the alternatives to getting a loan for credit card debt?

If you shop around and find that using a personal loan to pay off credit card debt won’t save you money, you need an alternative. Admittedly, none of these alternatives are easy, but each has a proven track record.

Work with your creditors

If you’re considering personal loans because you’re having trouble making your regular credit card payments, call your creditors and let them know what’s going on. Be honest about the issues and ask them to work with you. They can lower your interest rate or cancel some of the debt.

It’s important to note that if your creditor lowers your interest rate or settles the debt for less than the amount owed, the deal is reported to the credit bureaus and impacts your credit score. Debt settlement of any kind can stay on your credit report for seven years. However, if you are late on payment or making partial payments, your credit score has already been negatively affected. It’s important to stop the bleeding and start building stronger credit.

Pro tip: If your problem isn’t overspending, but bad credit, it’s possible to get a bad credit personal loan.

Tighten your budget

If credit card debt is giving you sleepless nights and you think your budget can be improved, this is the first place to look. Any cuts you make (even small ones) can be reallocated to your credit card debt, helping you get interest ahead of time and pay it off faster. You don’t necessarily have to cut anything out of your life, but consider cutting back on spending until your credit card debt is paid off. Here are some of the easiest ways to get started:

  • Put subscription services — like premium TV channels, prepackaged recipe services, or even unnecessary deliveries for your pet — on hold.
  • Limit impulse purchases at the grocery store.
  • Save money on utilities by turning off lights when you’re not in the room, opening windows instead of turning on the air conditioning, and doing laundry when water rates are lower.
  • Cook more at home and eat less in restaurants.
  • Spend time with friends at home instead of going out.
  • If you need new clothes, go to a consignment or thrift store rather than a department store.
  • Sell ​​things you don’t need or use.

Take a side scramble

If you’re struggling with debt, you’ve probably considered making more money. Here, we’ll cover a few ideas that won’t eat up all of your free time, but will add extra cash to your monthly budget:

  • Sell ​​things you like to do anyway. For example, if you’re a carpenter making address signs or a knitter making adorable baby sweaters, sell them on sites like Etsy.
  • It’s not a side hustle, but if you wanted to clean out the basement, attic, or garage, sell any valuables you don’t use regularly. You might be surprised how much money you have in the house.
  • Offer a “homework hour” (even if it’s a bit more Zoom). You know how hard it can be to get your own kids to do homework, so make it a community effort. For a fee, allow parents to drop their kids off at your house — or zoom in with you and other neighborhood kids — for an hour after school each day. Your role is to oversee their homework, answering questions as they arise.

Next steps: How to get a personal loan

If you decide that a debt consolidation loan is your best way to get out of debt, you can get started easily. Here is a brief overview of the steps. For more information, see our complete guide on how to get a personal loan.

Order one free copy of your credit reports. One in five Americans finds at least one mistake. Even just one can lower your credit score, so go through your three reports carefully – from Experian, TransUnion and Equifax – making sure the information is accurate. If you find an error, inform the office in question. They have 30-45 days to prove the information is correct or remove it from your report. If this sounds complicated, remember that the best interest rates and loan terms go to the strongest borrowers.

Shop the lenders. Everything from the minimum credit score for personal loans to interest rates and terms vary by lender, so apply with several. The best personal lenders do a soft credit check to see what you qualify for (it doesn’t affect your credit score). Once they run a smooth check, they tell you what your interest rate will be with them. Only when you move forward with a lender is there a rigorous credit check. This check puts a small dent in your credit score, but it bounces back quickly with regular monthly payments.

Provide documentation. After a lender has performed a thorough credit check to verify all of your information, there is usually a request for documentation. You may be asked for things like ID, pay stubs, or tax returns. The sooner you provide them to the lender, the sooner you will get your loan.

Sign loan documents and wait for financing. Personal lenders take anywhere from one business day to several weeks to deposit funds into your bank account, so be sure to inquire about this when shopping around with lenders.

Pro tip: To save time, gather proof of identity, information about your employer, payslips, and last year’s tax returns before applying for a loan.

Consolidating debt with a personal loan can be a faster and cheaper way to pay off your credit card balances. Before jumping into a side hustle, cutting back on your expenses, or taking out a personal debt consolidation loan, think about what will work best for you.

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