There's never a good time to be in credit card debt, but it can happen to the best of us when faced with unexpected costs, job loss or medical bills. And once you get behind on a credit card payment, your debt can snowball thanks to high interest rates.
A personal loan is one way to refinance high-interest credit card debt and consolidate debt from multiple cards. Transferring your revolving credit card debt to a fixed-term loan with a consistent monthly payment can often help people map out a debt payoff plan and set their sights on a goal.
Now may be an ideal time to refinance, according to the latest Federal Reserve data. Interest rates for credit cards have gone up consistently since 2016 (the average interest charged was 15.91% this February compared to 13.56% in 2016).
Meanwhile, personal loan interest rates have actually dropped slightly (averaging 9.46% APR for two-year loans this February compared to 9.69% APR in 2016).
These interest rate trends suggest now is an ideal time for anyone considering refinancing high-interest debt. But before you move forward, Select presents two questions to consider when you're trying to decide if you should consolidate your credit card debt on a personal loan.
1. Will you actually save money (even with fees)?
With a personal loan, at the very least, you'll pay interest. Sometimes, there might be other fees. Before you apply for a personal loan, make sure you'll actually save money. Here are five steps to take as you begin researching debt-consolidation loans.
- Look up your credit card's APR, so you know how much interest you're paying.
- Use a pre-qualification tool to get pre-approved for personal loan offers. Don't apply yet (that comes after you decide to move forward). Individual lenders like LightStream have pre-qualification tools on their website. Lending platforms like Upstart or LendingTree allow users to view multiple offers at once.
- Use a loan payoff calculator and credit card payoff calculator to plug in the balance, monthly payment and interest rates for both your credit card balance and desired loan offer(s).
- Pay attention to the total overall costs for each. If your loan includes an origination fee, don't forget to add that to the total.
- Compare the results to see if the personal loan will help you save.
It's likely that the personal loan will be the best money-saving option. But some cases aren't so cut and dry. For instance, the APR on one of my credit cards is 11.90% APR. That's a pretty low interest rate compared to other credit cards that charge upwards of 26% APR, but it's comparable to what some personal loan lenders charge.
2. Do you have a debt-payoff plan you can stick to?
Getting approved for a personal loan can feel like magic: Money usually shows up in less than a week from receiving the green light from the lender. While you can often opt to send creditors the money directly, it's more likely the funds will be delivered right to your bank account. (Learn how it all works here.)
It may seem silly, but you should prepare for the moment your money arrives. Visualize what all those zeros will look like when you sign into your bank account. Imagine what it will feel like to have a such a big windfall of cash, and then to see all your debt seemingly wiped away overnight.
It can be a big relief to pay off your balance in full, but without a plan on how to get out of debt for good, it's easy to get pulled back into the cycle of credit creep once the debt is out of sight, out of mind.
Therefore you need to have a budget and a plan. Think ahead and anticipate any major expenses coming up, and try to save a little bit of cash for them so you're not forced to rely again on credit. If you want to continue using a credit card, get into the habit of setting aside cash for your purchases and paying off your card in full every billing cycle.
Some people cut up their old credit cards or put them away in a drawer to avoid overspending, but if you don't want to miss out on earning travel points or cash back, try choosing just one card with the best rewards for your lifestyle and using it exclusively while being very mindful of every dollar you charge.
Budgeting and money management are skills that you can improve. Both beginner budgeters and long-time finance enthusiasts can benefit from learning new ways to track their cash. For a little help, try one of our best budgeting apps.
Bottom Line
Anyone who feels underwater with credit card debt can arguably benefit from a debt-consolidation and/or debt-refinancing loan. But before you move ahead with a loan application, pause to consider what you need from a loan so that you dig yourself out of debt — and not deeper.
For more information on how to make the most of your loan, check out these 10 questions everyone should ask before turning in a personal loan application.
