If you’re having a hard time paying down your credit card debt, you may want to consider consolidating with a credit card consolidation loan, better known as a personal loan. This is one strategy that can help give you the extra time you need to pay down several debts, especially if you’re struggling to manage multiple monthly payments. If you’re able to find a credit card consolidation loan with a low APR, you’ll be able to slash your interest charges, too, and potentially pay your debts off even faster. Use our comparison widget below to find the best loan for you!
Compare Credit Card Consolidation Loans
That being said, taking out a loan to pay off a credit card is not always the best option for everyone. It’s smart to consider the pros and cons to help determine whether a credit card consolidation loan is right for you.
In this article, we’ll cover everything you need to know about consolidating your credit debt with a loan.
What is a credit card consolidation loan?
A credit card consolidation loan is a personal loan that can be used to consolidate your credit card debt. An unsecured personal loan allows you to take out money without collateral. However, these loans can sometimes have higher interest rates because they are a risk to lenders. These types of loans can provide a fixed loan amount (what you want to borrow) with a fixed monthly payment and a fixed term. This helps you to know what you’ll pay each month and how long it will take to pay off the loan.
Personal loans can also have fixed-interest rates, meaning they won’t likely change throughout the length of your loan. These rates usually depend on your credit history. Those with good credit can usually receive lower rates than those with poor credit.
When should you consolidate?
People consolidate for many reasons and at various times. However, high-interest rates on current debt can be a major deciding factor. A credit card debt consolidation loan can possibly offer lower interest rates and provide one easy monthly payment.
Paying off your balance can often seem impossible, especially when you’re only making minimum payments each month. This might be a good time to consider consolidating your debt. With a credit card consolidation loan, you have a set period of time to pay off your debt (unlike with a credit card) so you can possibly get it paid off sooner.
If you consolidate your credit card debt with a loan, that debt is paid off. You no longer need to worry about high-interest rates and fees on your credit card accounts. Instead, you’ll only have one monthly loan payment to focus on.
While there are many good reasons to use a loan to consolidate your debt (we will get to a couple below!), there are times when this might not be ideal. For example, if you don’t have enough income to cover the cost of your loan payment each month or if you have an extremely high debt-to-income ratio, taking out a loan may not be the best option.
Why should I pay off a credit card with a loan?
There are many benefits when consolidating your credit card debt with a loan.
- Have one monthly payment instead of multiple payments, and can possibly receive a lower interest rate and lower monthly payment.
- Have a fixed term to pay off your loan so you can get your debt paid down faster.
- Without several accounts to worry about each month, you can focus on paying just one.
- By having a fixed monthly rate on a fixed schedule, you can get in the habit of paying your bill on time every month, which can help improve your credit score.
- A loan can also help minimize your credit utilization rate. This is the rate that determines how much of your credit limit you utilize and is one of the major determining factors for your credit score. To retain a good credit score, your credit utilization rate should remain below 30%.
- You’ll also improve your score by adding an installment loan to your credit report. Credit mix is part of calculating your credit score and it’s good to have a variety of revolving credit types.
How to qualify
When applying for a credit card consolidation loan, lenders look at certain aspects, including your credit score and income and expenses.
Because your credit score is a reflection of your ability to manage and repay debt, the higher your credit score, the more likely it is you could qualify for a loan.
Your credit score is based on a number of factors, including:
- Payment history: On-time payments show you can manage your finances. However, late or missed payments can bring down your credit score.
- Amounts owed: This factor considers how much debt you are carrying compared to the amount of credit extended to you. A credit utilization ratio of 30% or less could indicate that you know how to manage credit.
- Length of credit history: A long credit history is generally better than a short one. The average age of your open accounts may also be taken into account when calculating your credit score.
- Credit mix: The types of credit you use may also affect your credit score.
- New credit: When you apply for credit, your lender may conduct a hard credit inquiry on your credit report. Having too many hard credit checks in a short period of time could harm your credit.
If you don’t know your credit score and want to check as well as discover the factors that influence your score, you could sign up for My LendingTree. LendingTree is the parent company to MagnifyMoney.
Income and expenses
Income is another factor lenders may consider when approving you for a loan. But a high income does not necessarily mean you will get a better interest rate.
Although a higher income could mean you will be able to pay your monthly obligations, if you have high expenses, lenders may be wary of lending money to you. Thus, you should aim to have a low debt-to-income ratio.
Your debt-to-income ratio compares your monthly payments to how much money comes in each month. A lower debt-to-income ratio is preferable when you are applying for credit.
Fees and fine print to watch out for
While consolidating your debt with a loan can be smart, it’s not perfect. There are certain things to watch out for, including fees, penalties and the annual percentage rate (APR), which can vary with each lender.
Origination fee. Some lenders may charge an origination fee of 1% to 8% to process your personal loan application. This type of fee is generally included in the APR and deducted from the loan amount. That means if you borrow $10,000 and you’re charged a 2% origination fee, you’ll walk away with a loan of $9,800. An origination fee can be a percentage of the loan amount itself or charged as a flat rate.
Rates. The annual percentage rate (APR) is usually based on the borrower’s credit score. If a borrower has good credit, there is a better chance of receiving a lower rate. It’s essential to shop around to find the best rate for your needs.
Prepayment penalties. While most lenders don’t charge a prepayment penalty, it can happen. This is a fee to the borrower if they decide to pay off their personal loan early.
Precomputed interest. A certain way some lenders calculate interest on a personal loan that can have you paying a higher interest rate if you pay off your loan before the term is up.
Credit card consolidation loan vs. balance transfer
Consolidating your credit card debt with a credit card consolidation loan might be a good option, but it’s important to look over all other prospects to know for sure.
|Credit Card Consolidation Loan||Balance transfer|
Types of debt you can consolidate
Personal loans can be used to pay off different types of unsecured debt, including medical bills not covered by insurance, along with credit cards.
Credit card debt only. Can’t transfer debt from cards of the same issuer.
Up to 35.99% or higher depending on credit/lender
0% intro APR; variable APR once promo period ends
Promo periods typically last 12-21 months; balance can revolve indefinitely after that.
1%-8% origination fee; some lenders charge no origination fee.
3%-5% balance transfer fee; some offers do not charge a fee.
Shopping for credit card consolidation loans online
Finding consolidation loan offers online is a relatively easy process and you’ll be able to compare different options all at once.
How to find them
Get started by having a firm grasp on how much you want to borrow and the amount of time you’ll likely need to pay back your loan. Keep an eye on your credit history so you know your score and can attest all information is correct.
Search and compare credit card consolidation loans online with the help of our easy-to-use online comparison tool at the top of this article. You can shop different borrowers at once with only a soft credit inquiry that will not impact your score.
LendingTree, our parent company, also has a convenient debt consolidation calculator that can help determine your estimated monthly payments by simply entering your consolidation loan amount.
Credit Card Payoff Calculator
What to compare
When shopping for a credit card consolidation loan, it’s important to compare the rates to find the best one that fits your budget. You want to ensure you’ll be able to pay for the monthly payments and that you are getting a better rate than the one you already have with your credit cards. You’ll also want to keep an eye on the loan terms and the loan amounts offered as each can vary. It’s also important to look for any possible fees, including origination fees that can sometimes be tacked onto personal loans.
Consolidating your credit card debt with a loan may be a good idea, but it’s smart to do extensive research to make certain it’s the right choice for you.