When juggling multiple credit cards with eye-popping interest rates becomes overwhelming, it’s time to take a different approach. There are many strategies for paying off credit card debt, but it’s important to find one that works with both your finances and your psychology. To find out if consolidating your debt with a personal loan might be for you, consider these five factors:
You have a credit score of 700 or above
To get approved for a personal loan that has a lower APR than your credit card, you will need a credit score of 700 or higher. You may still be able to get approved for a personal loan with a lower score but the APR may be higher than you are currently paying on your credit cards so it’s not always the best financial move.
You have more than $10,000 of debt
Personal loans are most useful when your debt exceeds $10,000 because they have higher limits. Many lenders have limits in the $35,000-$50,000 range but some will lend up to $100,000. Below $10,000 in debt, you may be better off with a balance transfer card or two.
You need a structured payment plan
Credit cards are hard to pay down because they are revolving lines of credit—meaning that as long as you stay under your credit limit, you can continue to use them for new purchases, and therefore, your balance can increase over time. That’s not the case with personal loans. Personal loans are installment loans which means that you borrow a fixed amount and pay a fixed monthly payment on the balance. With a personal loan, your balance is always decreasing. This is a huge benefit for people who don’t want the onus of having to think about how much to pay toward their debt each month.
You can fit the monthly payment in your budget
The monthly payment on a personal loan will be at least a little bit higher than the minimums on your credit cards—how much higher depends on the length of the loan. If you have just been paying the minimums on your credit cards, make sure that you can commit to the higher monthly payment before you apply for a personal loan.
You can put the credit cards away
The biggest danger with taking out a personal loan to consolidate your credit card debt is that your credit cards are then clear to use again. This means that you can rack up your credit cards all over again and end up with twice the debt you had before—yikes! When you consolidate your debt, practice living without your credit cards first and make it impossible to use them by getting rid of the physical card.
