The information in this article is up to date through tax year 2018 (taxes filed in 2019).
Credit card debt ranks in the top four highest debt categories, alongside student loans, mortgages, and auto loans. Though any type of debt is a major cause of stress, those who have credit card debt often feel shackled and anxious. Here’s some insight that, we hope, will guide you toward an informed decision about next steps for tackling your credit card debt.
Borrowers paying off credit card debt as interest rates rise
A recent Survey of Consumer Finances by the Federal Reserve showed that close to half (44%) of American families carried a balance on their credit cards in 2016—$5,700 on average.
Now that interest rates are heading up, many people are feeling a new sense of urgency about paying off their credit card debt as quickly and cheaply as possible. Reports submitted by lenders to the Federal Reserve show average credit card interest rates climbed from 12.95% in 2013 to 14.89% as of August 2017. But average interest rates on personal loans fell from 10.2% to 9.76% during the same period.
That helps explain why borrowers are increasingly turning to personal loans to pay off credit card debt, consolidating balances on multiple credit cards in the process.
How Credit Card Consolidation Saves Money
Borrowers who pay off credit card debt with a personal loan typically save money in two ways: They reduce their interest rates and pay down their loans faster.
Consider a borrower paying down the average credit card balance of $5,700 at 14.9% interest. If that borrower makes only the minimum payment, his or her initial monthly payment will be just $128. But it will take 19 years to wipe out that debt, by which time the borrower will have paid $6,200 in interest.
Increasing that monthly payment to $197 would allow the same borrower to pay off debt in only three years, with $1,400 in interest charges.
Reducing the interest rate by paying off credit card debt with a personal loan produces even greater savings.
If you’re able to take out a $5,700 personal loan with a three-year repayment term and an interest rate of 9.76%, your monthly payment term will drop to $183, and you’ll only pay about $900 in interest.
Three options for repaying $5,700 in credit card debt
|Interest rate||Repayment term||Monthly payment||Total interest charges|
|14.9%||19 years||Minimum* ($128 to start)||$6,213|
*Most credit card issuers will require a minimum payment that’s equal to the amount of interest you owe, plus 1% of your balance.
Personal Loan vs. Balance Transfer
Another commonly employed method of consolidating credit card debt at a better interest rate is to transfer balances on several high-interest cards to a single low-interest card. A drawback to that approach is that low introductory rates on balance transfers may expire before your debt is paid off.
Interest rates on credit cards have been heading up because they’re indexed to market-driven benchmarks like the prime rate and the London Interbank Offered Rate (LIBOR).
When you pay off multiple credit card balances with a personal loan, you can lock in a lower, fixed interest rate.
Paying off credit card debt with a personal loan can also improve your credit score because you’ll be utilizing less of your available credit card limit, and establishing a history of making payments on an installment loan.
Keep in mind that borrowers may do more harm than good to their credit score if they immediately run their credit card balances back up to their limits, particularly if they are taking on more debt than they can handle.
Points to consider before consolidating
To find the lender that’s right for you, it’s important to check the rates and terms that you can qualify for with multiple lenders. Each lender has its own rules for qualifying borrowers and setting rates and terms.
The Credible.com marketplace is integrated with credit bureaus and lenders, allowing you to see the actual rates you’re prequalified for with a range of vetted lenders in about two minutes. That protects your credit score, and your personal information isn’t shared unless you see an option you’d like to proceed with.
With upper limits ranging from $35,000 to $50,000, a personal loan from one of Credible.com’s partner lenders can pay off several big credit card balances. Credible.com’s partner lenders currently offer fixed rates as low as 4.99%, and loans with repayment terms of two to five years.