You’re in a lot of debt, and you’re worried about how you’ll get out of it. With your high-interest credit card and the amount of debt you’re saddled with, you’ve only been able to make the minimum payments each month. However, you know this is a recipe for disaster since you’ll end up paying much more for your debt over time.
Now, you’re wondering: Is it a good idea to take out a credit card debt loan? Is this going to save you money?
By researching credit card debt loans, you can decide if taking one out is the right decision for you.
Are There Personal Loans for Credit Card Debt?
Yes, there are personal loans for credit card debt. If you have a high credit card balance, you could potentially take out a personal loan from a lender with a lower interest rate than your cards offer.
Once you receive the funds, you would use them to pay off your cards with high interest rates and then pay back the loan instead.
This could be advantageous not only because you’ll save money, but also because you won’t have to make multiple payments on different credit cards each month. You’ll simply owe your lender a single payment on the same due date each month; you won’t have to keep track of all your cards and have a higher chance of missing a payment.
You know that if you miss a payment, you could acquire late fees, as well as a ding on your credit report. Before applying for an unsecured personal loan, you'll need to compare personal loan rates to see which one is best.
Borrow Cash, Build Credit.
Credit Card Debt Consolidation Loans
You will need to provide the required information to the lender when you apply for a personal loan or a credit card consolidation loan.
Typically, in order to receive loan funding, you’ll need an average credit score of about 650.
Debt consolidation loans are available to you if your credit score is lower, but you’ll pay a higher interest rate.
Plus, you may be subject to stricter terms and conditions, such as late or early repayment fees.
Raising Your Credit Score
Before going through the application process for a credit card debt loan, you could try to raise your credit score, which will increase your chances of qualifying for a more attractive loan.
To raise your credit score, you need to know what it is first. You can monitor your FICO credit score directly through Experian, Equifax, or TransUnion, or take advantage of the many credit monitoring companies out there. In addition, you can check to see if your bank or credit union offers free credit reporting as part of being a customer.
Other ways you can raise your credit score include:
- Make sure your debt utilization ratio is as low as possible. (Lower than 30% is ideal.)
- Stop using your credit card to cover day to day purchases.
- Pay more than the minimum payment for your card each month.
- Check your credit history for errors or mistakes.
Once you have fair credit, good credit, or very good credit, you’ll be able to snag a better interest rate on your credit card debt loan. (According to Experian, a score of 580-669 is Fair, 670-739 is Good, and 740-799 is Very Good.)
Keep in mind that every time you apply for a loan, there’s going to be a credit inquiry, and having too many of these on your report could lower your score.
Our advice: Carefully choose one or two loans you’re going to apply for instead of applying for many at a time.
Loan Offers
You may be able to find loan offers through banks, lending companies like LightStream, Marcus by Goldman Sachs, and SoFi, as well as credit unions.
Your funds could come through as soon as the next business day depending on your loan options.
The life of the loan will typically range from 12 to 84 months, and you can connect your bank account to your loan account to make automated payments every month.
Does Paying My Debt Off With a Loan Hurt My Credit Score?
Initially, your credit score could drop when you apply for a credit card debt loan because of the credit inquiry that’s going to take place. Additionally, taking on a new loan and new debt may increase your credit utilization ratio. Of course, if you fall behind on payments with your loan, then your score will likely drop.
One thing to note: Even if you pay your credit cards off, you might not necessarily want to close them. If you do, it could make your credit history seem shorter than it is, and the length of your credit history is an important factor in determining your score.
Things to Watch Out For
Before you decide to sign on the dotted line for a credit card debt loan, make sure you read the fine print.
For instance, what is the annual percentage rate? Is there an origination fee for your loan? Is interest compounded daily? Will you have to pay a prepayment penalty fee if you pay the loan back early? Is there a high fee if you miss a payment?
How about customer service: Does your lender have good reviews, or do people give them bad reviews online? Are there any BBB complaints against your lender? By looking into all these things, you can avoid any issues with your loan down the line.
In addition, make sure that you aren't trading one debt hole for another. Will you be able to pay the monthly payments easily, or will they strain your budget? If you've been depending on your credit cards to cover expenses, you run the risk of using them in addition to taking on the new loan.
It's a good idea to make a budget to help you see how your monthly finances will look, and make a financial plan for the next few months to a year to make sure you're headed towards being debt free rather than digging deeper.
Credit Card Debt Loan Alternatives
If you are hesitant about taking out a credit card debt loan, you do have other options.
Balance Transfer Card
You could open a balance transfer credit card, which will give you an introductory APR with a time limit (like 12 or 18 months) to pay off your debt, interest-free.
All you’ll have to do is pay a balance transfer fee, which is normally 3% or 5% of the total amount that you transfer.
Make sure you pay off your debt before the end of the introductory period, or else you could get stuck paying a balance with high interest again.
Home Equity Loans
Do you own your home? Then you could go for a home equity loan, as well. You’ll probably need to go through a home appraisal, and a huge downside is if you default on your loan, you could lose your home.
However, home equity loans offer long repayment periods and lower interest rates than personal loans.
Debt Management Plans
You could also try a debt management plan with credit counseling. Debt management companies will work with your credit card providers to lower your interest rates, and then roll your monthly payments into a single payment.
You’ll likely have to pay the company a startup and monthly fee, and you may have to shut down your credit cards. Your credit score will probably take a dip at first, but as long as you keep up with your plan, it should increase in the long run.
Another good thing about these companies? They will typically provide credit counseling and answers to FAQs about credit card debt to help you get back on track, too.
The Bottom Line
A credit card debt loan could make all the difference when it comes to paying off your debt and raising your credit score.
Just make sure you do your due diligence before signing any paperwork so you know this is the best decision for you—and your financial future.
