Making monthly payments on time every time is an important factor when it comes to creditworthiness. When you make low monthly payments for less than the minimum amount due, this often results in the credit lender reporting your account as past due on your annual credit report, which can negatively impact your credit score.
Pro Tip: If you’re struggling to make payments on time, or if repayment is difficult because of high-interest fees, a personal loan that offers a lower interest rate can save you big on interest fees and get you out of your financial hole faster than you thought possible. Borrowers who qualify for a personal loan with a low-interest rate can also enjoy lower payments, which will make it easier to ensure that monthly payments are manageable and paid on time.
It can also mean that there will be more money left over each month to put towards paying off the loan balance, or it can be used to pay other debts and bills on time.
Before Making a Decision, Consider the Terms of the Personal Loan
Before you use the personal loan funds to pay off your credit card debt, you should consider the length of the loan and the interest rate. While the payments may be lower, it could take much longer to repay the debt, depending on the loan terms.
A lower interest rate, coupled with a longer repayment term can end up costing more in the long run, however, it can also help you better protect your credit.
Should you keep the Credit Card Account Open?
If you decide to go ahead and get a personal loan to pay off your credit card debt, we don’t recommend automatically closing the credit card account once the balance rolls back to zero. Closing your credit account will end up reducing your available credit. This can affect your balance to limit ratio or your utilization rate. A higher balance to limit ratio will also mean a negative effect on your scores. Additionally, depending on the credit account age, closing it out can also negatively impact your length of credit history.
- If you decide to keep your account open, you’ll probably also be tempted to use it again. Because of this, closing it out may be the best option for you. The answer will really depend on personal circumstances. The important thing for you to keep in mind is that you should never use your card to spend more than you can afford to repay.
- Once your debt is paid off, your goal should be to pay off the total credit card balance every month, in full. By doing this, you can avoid spending money that will go only towards paying off the interest. This will show that you can use your credit wisely. This will help to increase your credit scores.
The Three Best Reasons to Use a Personal Loan to Manage Credit Card Debt
There are some instances when taking out more debt than you’re able to pay off makes sense. Using a personal loan to pay off your debt is just one way to move money around, but the debt will still be there, it will just be another load of debt that offers better terms. There are a few times it can make more sense to pay off your credit card debt by taking out a personal loan.
The first reason, of course, is to lower your annual interest rates. Usually, personal loans can be the perfect way to lower these rates. You shouldn’t consider a loan to consolidate credit card debt if it doesn’t offer lower annual interest rates. Paying a lower rate allows you to pay off more principle every month.
Next, a personal loan can help you to consolidate debt if you use the loan to cover several credit card payments. Having just a single loan payment will allow you to focus your attention, time, and energy into just one payment. It’ll be much easier to concentrate on just one large debt instead of several small debts. Of course, it will also be important not to rack up your credit card balances once you consolidate the debt with a loan. It won’t do any good to focus on paying off a large debt if you accumulate smaller credit card balances again. You must avoid the ongoing cycle of debt. To do this, you’ll need to address the fundamental, underlying reason why you’re always in debt. Do you have trouble sticking to a budget? Do you have a spending problem? You must address these issues in order to remain out of debt.
The last reason to use a personal loan to pay off your many credit cards is to lower your total monthly debt payments. You’ll need to run the numbers, but you will probably find that your minimum monthly payments for a personal loan will be significantly smaller than the total minimum payments for all of your credit cards each month.
A lower monthly payment will help you to create a debt snowball, assisting you in paying off your debts much faster. As an example, if you were paying around $600 a month in minimum credit card payments and now find yourself paying just $500 a month on your loan, you’re now able to afford to use that extra hundred dollars each month for the loan’s principal. This type of strategy will help you to get out of debt faster.
Final Thoughts
If you took out a personal loan and you’re not restricting your credit card debt, either by lowering your interest rates or by cutting down your monthly payments, then it probably isn’t a good idea to restructure your debt. Moving your debt around should be a worthwhile move. You should insist on a lower interest rate and lower monthly payments in order to pay your debt off faster. This will allow you to take control of your finances through one low monthly payment.
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