Like many bad habits, depending on credit cards can seem like being on a treadmill – you keep putting in an effort to make payments, but you never seem to get anywhere. One way to break that pattern and kick the credit card habit is to use a personal loan to get out of credit card debt.
Credit cards have two key disadvantages for people trying to get out of debt – they tend to be expensive, and they are open-ended rather than representing a finite amount of debt to repay over a fixed period. A personal loan can address those problems, but it is not a magic cure-all for debt problems. To be used effectively, a personal loan has to be part of a broader commitment to break the debt habit.
Advantages of a Personal Loan Over Credit Cards
Here are some reasons why a personal loan can be a better tool for managing debt than credit cards:
- Lower rates. On average, credit card balances incur an interest rate of 13.51 percent, while the typical personal loan rate is 10.03 percent. The less of your money you have to spend making interest payments, the more you can direct towards paying down the principal of your debt.
- Consolidation can help you organize your finances. Debt problems are often complicated by lack of organization. People who use credit cards heavily tend to run up balances on multiple cards, and then it can be a struggle to keep track of payment amounts and deadlines. Disorganization can be costly, as missed or late payments add fees and extra interest charges to the debt burden. Using a personal loan to pay off credit card debt can consolidate your payments into one loan, making it much easier to plan for payments and keep track of the timing.
- A finite repayment schedule points you towards getting rid of the debt. Minimum payment amounts on credit card balances are generally designed to pay down the debt very slowly so the credit card company can earn more interest. In the meantime, it is easy to accumulate new charges faster than you are paying down the balance. With a loan, you would borrow a specific amount and get on a fixed schedule for repayment. Credit cards are geared more to rolling over debt, while loans are geared towards repayment.
Keys to Using a Personal Loan to Get Out of Credit Card Debt
The above characteristics of a personal loan can work to your advantage, but they do not automatically solve your debt problem. Here are some things you should do to succeed in using a personal loan to get out of credit card debt:
- Find the most favorable loan rate you can. As noted above, there is generally a rate advantage involved in replacing credit card debt with a personal loan, but how big that advantage is will vary from lender to lender. Shopping around will help you make the biggest reduction in interest expense.
- Build a budget around your loan payments. Don't take out the loan until you have planned for how you will make the payments, and how you will rein in spending so you don't just re-inflate your credit card balances. Remember, the idea is to use the loan as a tool for paying down debt, not simply as means of enabling more spending.
- Swear off of unplanned credit card purchases. A budget is only as good as your discipline in following it. If you can't stop impulse spending, then take your credit cards out of your wallet except when you are going to make a budgeted purchase.
- Retire your highest-rate credit cards. Once you have paid down your credit card balances with a personal loan, you have the option of canceling some of those cards. Look at which ones charge the most interest, and target them for cancellation.
Breaking bad habits is never easy, but it can be so satisfying when you succeed. A personal loan can help you change the way you use debt, rather than repeating the cycle of credit card use over and over again.