The credit card payoff option no one is talking about

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The credit card payoff option no one is talking about


Brace yourself for an intimidating statistic. As of June 2015, credit card debt in the U.S. totaled $906.5 billion, an average of $7841 of debt per U.S. household.

If you're one of these Americans with credit card debt, you may be making repayments with high interest rates - the average credit card interest rate is about 15 percent. But instead of dealing with sky-high interest rates, what if you could pay off your credit card debt with a much lower interest rate?

This has to be a fantasy, you might say. But you may be able to do this by using a personal loan.

What is a personal loan?

Personal loans give borrowers access to funds to use at their discretion -- in other words, they allow consumers to use these funds for personal use.

These types of loans are typically unsecured loans, meaning they don't require you to put down collateral to obtain the loan. This is unlike secured loans like mortgages or a car loans, where you typically use your home or car as security for repayment of your loan - which your lender can take if you don't make your payments.

An alternative payoff option.

While personal loans may have higher interest rates than secured loans, they often offer lower interest rates than credit cards -- some as low as six percent, though you typically will only qualify for rates this low if you have excellent credit. The average credit card interest rate is close to 15 percent, although if you have excellent credit, you may qualify for a lower interest rate.

A personal loan may be an enticing option if you have a lot of credit card debt, as it could allow you to pay off your high-interest credit card debt and then pay off the personal loan at a lower rate. Typically, as most lenders have a $1,000 to $3,000 loan minimum, personal loans are a viable option only if you have several thousand dollars of debt.

In other words, using a personal loan to pay off credit card debt could help you save money on interest and potentially get out of debt faster.

Is it the right option?

Taking out a personal loan to pay off your credit card may make financial sense in the short term. But a personal loan may not be a viable long-term solution unless the root cause of debt is addressed.

Is your debt the result of an overspending issue or a lack-of-income issue? Whatever the cause may be, consider identifying and treating the cause of debt by making lifestyle and financial changes before taking out another loan.

Beverly Harzog, consumer credit expert and author of The Debt Escape Plan, offers another alternative to personal loans. "If you have an excellent credit score, you may be better off getting a balance transfer credit card that offers a zero percent introductory APR. This way, you can pay off the debt without paying interest." Of course, this is only true if you pay off your balance before the zero percent introductory APR period expires.

If your credit score isn't high enough to qualify, though, a personal loan may be a good option. Harzog says, "Your goal is to get an interest rate lower than the one you're currently paying on your credit cards."

What are some potential issues with using a personal loan to pay off credit card debt? Shannon McLay, founder of financial services company The Financial Gym says, "It's important to note that your interest rate with a personal loan may be lower than your credit card rates; however, you're locked into a set monthly payment for a specific period of time and this monthly payment may be higher than the minimum payments on your credit cards."

So you may save money on interest, but your overall payments could be higher and present a cash flow issue. And according to McLay, if you miss payments on your personal loan, it most likely will negatively impact your credit score.

Bottom line

Taking out a personal loan to pay off credit card debt is an unconventional alternative that could save you money over time. If you've treated the root cause of debt and have stable cash flow, a personal loan might be an attractive option.

However, it's important to read the terms and conditions and ask a lot of questions. Harzog advises borrowers to "read the fine print carefully and look for fees, such as loan origination fees and pre-payment penalties." Loan origination fees are charged by the lender and are typically a small percentage (5 percent or less, generally) of the total loan. Pre-payment penalties are additional fees added for borrowers who pay off their loans early.

And if you decide to take out a personal loan, try to work with a reputable lender.

How can you do this? "It's a good idea to check with a local credit union or your own community bank and see if you can get a personal loan that way. There are also loan comparison sites that can help you find the best rates. When you choose a lender, check the BBB (Better Business Bureau) to see if there have been any complaints before you sign a contract," Harzog says.

In short, a personal loan can be a viable option to pay off credit card debt, but it's important to do your research and to ensure it makes financial sense for you in the long run.

About the author: Melanie Lockert is a freelance writer and editor currently living in Portland, Oregon. She is passionate about education, financial literacy and empowering people to take control of their finances. Her work has been featured on Rockstar Finance, GoGirl Finance, The Globe and Mail and more.

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A personal loan is a good idea to improve your credit card debt ratio especially if it is very high. However, if you are really committed to paying down your debt quickly if you take the personal loan too quickly while your debt ratio is very high (your FICO score is low at this time) you will have to pay a higher interest rate. Therefore it helps if you could first cut down all your fixed and variable expenses for a few months and pay down the debt as fast as you can using any and as much of your savings as you think is not too risky. While doing this I noted that although my FICO scores and reports (the free ones) did not immediately show that I had paid down $15,000 in debt bringing down my credit card debt ratio from about 70% to  about 46%, I noted that my personal loan offers started increasing much more quickly in terms of the number of loan offers and their lower interest rates. I started paying down my debt around the end of March 2016 at which time the interest rates for personal loans were about 20% and higher. Now about 2 weeks later even though the "free" bank FICO scores and reports don't reflect my improved credit card ratio, the financial institutions making the personal loan offers have noticed that I have paid off about 10 credit cards and had a $3000 credit increase. Today I have had 11 personal loan offers from Lending Tree right here at CK for loans between 8,000 and 32,000 with interest rates mostly at the 10% rate thru 13% range with no hidden fees and no loan origination fees. However, I have decided to hold off on this and do it a bit later when my FICO score is clearly seen to be higher by the credit card institutions. You see I have about $29,000 in debt remaining on 3 credit cards. I am using bank A's credit card to do a balance transfer to bank B's credit card at a very low interest rate for about $3,000. A bit later I plan to use bank B's credit card to do a balance transfer on Bank A's credit card for $5,000. These 2 banks charge me a regular interest rate of 16% normally but on balance transfers its 0 thru 6% and with one of them with zero transfer fee. The 3rd credit card charges me 8% so I pay that balance of 9,000 a bit slower. This plan is already set so I have to be patient for another month or so for my FICO score to reflect my debt ratio drop consistently as I am doubling up on paying my big balance (about 15,000) to about $600 plus a month using the savings cash flow I have already reaped by eliminating 10 accounts with interest rates in the 21 to 27% range. As my debt ratio continues to go down aggressively I plan to apply for another big credit card that is like pre-approved with a soft credit check to be approved which at worst case I will be denied and lose about 2 FICO points for a little while. However, the odds are I will be approved as the FICO score is increasing with my aggressiveness. When the personal loan offers start dropping into the 6 to 12% range I will dip into them and wipe out the credit card debt that remains in the 16% range. The lesson learned here is that it is very easy for anyone to spend beyond their means but it takes aggressive single mindedness to get yourself out of the hole. Of course I will now ensure that I only carry one or two credit cards for emergencies, always use my debit/cash cards first and keep my credit cards minimally active at about 1 to 5 % debt usage once or twice a year to ensure that my creditors don't close those accounts. I will not need to apply for more credit cards unless I see one that is very prestiguous with a very low interest rate but I will at most do that only once a year. I am already beginning to feel a sense of "credit power" and although I am not yet into the "excellent" FICO category, this issue already seems resolved. I now think that 12 to 16% is "high" interest and a little while ago I would have jumped at those 11 offers. You can win this credit game if you really have a desire to do so.

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