What type of loan should I get to pay off credit card debt?
One way is to apply for a personal loan to effectively move your debt from your credit card issuer to a personal loan lender and hopefully snag a smaller interest rate and better repayment options. By doing so, you'll likely pay less in interest in the long run and can eventually become debt-free.
Generally, you can use a personal loan to pay off credit card debt. It typically has lower rates and a fixed monthly payment that can help you pay your debt off sooner compared to making minimum payments on all your cards.
Yes, you can use a debt consolidation loan to pay off your credit card debt, but it depends how much debt you have on your credit cards. Remember – you'll still need to pay back what you owe, but you'll be paying a single rate to us instead of various rates to a number of card providers.
There is no point in paying expensive credit card monthly payments once you have racked up a big outstanding balance. The smart thing to do is take a personal loan that repays the entire credit card bill in one-shot and then make pocket-friendly EMIs through the tenure.
Snowball method
To get started, list your account balances in order from lowest to highest. Set up your budget to pay the minimum on all your credit card accounts except the one with the smallest balance. For that balance, put as much extra money as you can toward paying it off each month.
Using a personal loan to pay off debt helps you get rid of multiple payments and go down to one payment per month — and hopefully with a much lower APR. Consider using a debt repayment calculator to determine how much sooner you could pay off your debt with a lower interest rate.
If you take out a personal loan that has a lower interest rate than what you're paying on your credit cards, you could save a lot of money in interest charges by using your personal loan to pay off your credit card debt.
Borrowing from one lender to pay another doesn't always make sense, but consolidating debts might result in a lower monthly payment and interest rate than your existing credit card payments. It also might be easier to pay off a debt when you have a fixed repayment schedule.
If you do it right, debt consolidation might slightly decrease your score temporarily. The drop will come from a hard inquiry that appears on your credit reports every time you apply for credit. But, according to Experian, the decrease is normally less than 5 points and your score should rebound within a few months.
Perhaps not surprising — but still important — paying down higher amounts of credit card debt via a personal loan boosts your credit score even more. Borrowers who used a personal loan to pay down $25,000 or more in credit card debt saw their credit scores rise by an average of 71 points the month after.
What are 4 ways to eliminate credit card debt?
- Create a Payment Strategy. Developing a credit card strategy can give you more control over repaying your debt. ...
- Pay More Than the Minimum Payment. ...
- Debt Consolidation.
- Negotiate With Your Creditors. ...
- Review Your Spending and Have a Household Budget. ...
- Seek Debt Relief Assistance.
While there are no government debt relief grants, there is free money to pay other bills, which should lead to paying off debt because it frees up funds. The biggest grant the government offers may be housing vouchers for those who qualify.
Though a debt consolidation loan is a great choice for some, you also have other options. Creating a debt management plan, taking advantage of a credit card balance transfer or overhauling your budget are other ways to consolidate your debt with minimal hurt to your credit.
It will take 47 months to pay off $20,000 with payments of $600 per month, assuming the average credit card APR of around 18%. The time it takes to repay a balance depends on how often you make payments, how big your payments are and what the interest rate charged by the lender is.
- Make a list of all your credit card debts.
- Make a budget.
- Create a strategy to pay down debt.
- Pay more than your minimum payment whenever possible.
- Set goals and timeline for repayment.
- Consolidate your debt.
- Implement a debt management plan.
In order to pay off $6,000 in credit card debt within 36 months, you need to pay $217 per month, assuming an APR of 18%. While you would incur $1,823 in interest charges during that time, you could avoid much of this extra cost and pay off your debt faster by using a 0% APR balance transfer credit card.
The general rule of thumb is that you shouldn't spend more than 10 percent of your take-home income on credit card debt.
Does a personal loan hurt your credit score? Your credit score can dip a few points when you formally apply for a personal loan, but missed payments can cause a more significant drop. Getting a personal loan will also increase the amount of debt you owe, which is one of the factors that make up your credit score.
Having any credit card debt can be stressful, but $10,000 in credit card debt is a different level of stress. The average credit card interest rate is over 20%, so interest charges alone will take up a large chunk of your payments. On $10,000 in balances, you could end up paying over $2,000 per year in interest.
| Bank | Minimum interest rate on personal loan (%) |
|---|---|
| Punjab National Bank | 13.75 |
| Kotak Mahindra Bank | 10.99 |
| Axis Bank | 10.65 |
| IndusInd Bank | 10.49 |
What is a good interest rate on a personal loan?
A good personal loan interest rate depends on your credit score: 740 and above: Below 8% (look for loans for excellent credit) 670 to 739: Around 14% (look for loans for good credit) 580 to 669: Around 18% (look for loans for fair credit)
Personal loans have relatively lower interest rates than credit cards, but they must be repaid over a set period of time. Credit cards provide ongoing access to funds and you only pay interest on outstanding balances.
There is no set amount of debt you need to have to consolidate because lenders do not have any such requirement. But for the best chance of consolidation success, your debt payments, along with your rent or mortgage payments, should not exceed 50% of your monthly gross income.
Lenders might not advertise it, but most of them have a minimum credit score required to get a loan. If your score is less than 670, you might be out of luck for a debt consolidation loan. Even if you're over 670, a problematic debt-to-income ratio (more on that below) or payment history could derail your loan.
- Be a Responsible Payer. ...
- Limit your Loan and Credit Card Applications. ...
- Lower your Credit Utilisation Rate. ...
- Raise Dispute for Inaccuracies in your Credit Report. ...
- Do not Close Old Accounts.
