Using a personal loan to pay off credit card: A complete guide
Personal loan vs credit card debt
When comparing personal loans vs credit card debt, there are key differences to consider. Credit cards offer flexibility but often come with high interest rates that can make debt grow quickly. Personal loans, on the other hand, provide structured repayments with typically lower interest rates, though they require more commitment to a fixed payment schedule.
Why a personal loan to pay off credit card debt
Save money through lower interest rates: Personal loans generally come with more competitive interest rates compared to credit cards. This difference can be particularly significant if you maintain a good credit score, potentially saving you substantial money over the life of your debt. When more of your payment goes toward the principal rather than interest, you'll make faster progress in becoming debt-free.
Enjoy simpler financial management: Managing multiple credit card payments can be overwhelming and increase the risk of missed payments. By consolidating your debts into a single personal loan, you'll only need to track one monthly payment with one due date. This streamlined approach makes it easier to stay on top of your finances and maintain a clear view of your progress toward becoming debt-free. Not by chance, many Australians choose to use a personal loan to pay off debt because of the structured repayment schedule.
Follow a clear path to becoming debt-free: Unlike credit cards that allow for minimum payments and endless debt cycles, personal loans provide a clear endpoint to your debt. With fixed repayment terms, you'll know exactly when you'll be debt-free, making it easier to plan your financial future. This structure often results in faster debt repayment compared to making minimum credit card payments, as you won't face the temptation to pay less when times get tough.
Boost your credit score: Taking out a personal loan can positively impact your credit score in multiple ways. By diversifying your credit mix and reducing your credit card utilization, you demonstrate responsible credit management to potential lenders. Regular payments on your personal loan also help build a positive payment history, which is crucial for your overall creditworthiness.
Take control of your finances: Personal loans provide a level of financial discipline that credit cards don't offer. With a fixed amount and no ability to borrow more, you're forced to stick to your debt repayment plan. The predictable monthly costs and fixed interest rates make it easier to budget and plan for the future without worrying about variable rates or fluctuating payments.
Cons of having a personal loan to pay off debt
Face the risk of more debt: Without addressing the underlying spending habits that led to credit card debt, you might find yourself accumulating new credit card balances whilst still paying off your personal loan. This scenario requires strong financial discipline to avoid ending up in a worse position than where you started.
Deal with stricter payment terms: Unlike credit cards that allow minimum payments during tight financial times, personal loans require the same fixed payment each month. This rigid structure can become challenging if your income fluctuates or unexpected expenses arise. Missing payments can have serious consequences for your credit score and financial standing.
Watch out for hidden costs: Personal loans often come with various fees beyond just interest. You might encounter establishment fees when setting up the loan, ongoing administration charges throughout its term, and even penalties for paying off your loan early. These additional costs need to be carefully evaluated when determining if consolidation will actually save you money.
Consider future borrowing limitations: Taking on a personal loan affects your debt-to-income ratio, which could impact your ability to qualify for other credit in the future. This consideration becomes particularly important if you're planning major purchases or investments that might require additional financing. It's essential to consider how consolidating your debt now might affect your future financial flexibility.
How to use a personal loan to pay off debt
Taking out a personal loan to consolidate your credit card debt can be a strategic financial move when done correctly. Here's a comprehensive guide to help you navigate the process effectively:
Start by checking your credit health: Before applying, take time to review your credit report thoroughly. Look for and dispute any errors that might affect your borrowing power. Understanding your credit score helps set realistic expectations about potential interest rates and loan terms. Good credit typically leads to better loan offers, so it's worth taking steps to improve your score if possible.
Research your options carefully: Don't rush into accepting the first loan offer you receive. Take time to compare different lenders and get prequalified where possible - this usually won't affect your credit score. Consider factors beyond just interest rates: look at comparison rates, establishment fees, monthly repayment amounts, loan terms, and early repayment options. Pay special attention to whether the lender allows additional repayments without penalties.
Calculate the true cost: Make sure consolidation will actually save you money in the long run. Use loan calculators to compare your current credit card payments against potential personal loan scenarios. Factor in all costs, including:
Total interest over the loan term
Application and establishment fees
Ongoing account fees
Any early repayment penalties: A longer loan term might mean lower monthly payments but could result in paying more interest overall.
Prepare a strong application: Once you've chosen your preferred lender, focus on putting together a compelling application. Gather all necessary documentation upfront to avoid delays:
Recent payslips or income statements
Tax returns if self-employed
Bank statements
Proof of identity
Details of your existing debts
Current living expenses
Manage the transition effectively: After approval, develop a clear plan for using your loan funds. If the lender doesn't pay your credit cards directly, make sure to close or cut up old cards once paid off to avoid the temptation of running up new debt. Set up automatic payments for your new loan to ensure you never miss a payment, and consider creating a budget to help stay on track with your new financial commitment.
Alternatives to using a personal loan for credit card debt
You might be wondering if you can get a personal loan to pay off another loan or if using a personal loan to pay off tax debt is possible. But before deciding on a personal loan, consider these alternative approaches to managing your credit card debt. Each option has its own advantages and considerations:
Balance transfer credit cards
One popular alternative is moving your existing credit card balances to a new card offering a promotional interest rate. Many Australian credit providers offer 0% interest periods on balance transfers, typically ranging from 12 to 24 months. The benefits?
Interest-free breathing room to pay down your debt during the promotional period
Potential to avoid balance transfer fees with some providers
Opportunity to consolidate multiple card balances into one account Access to new card rewards and benefits
However, consider that you'll need a good credit score to qualify for the best offers, and any remaining balance after the promotional period usually reverts to a high interest rate. Most providers also charge a percentage-based transfer fee, which could impact your savings.
Debt snowball method
This approach focuses on paying off your smallest credit card balance first whilst maintaining minimum payments on other cards. As each card is paid off, you redirect those funds to the next smallest balance.
The main advantage might be psychological, though - quick wins build momentum and motivation. This method can be particularly effective if you're feeling overwhelmed by multiple debts and need to see progress to stay motivated.
Debt avalanche method
Similar to the snowball method, but you prioritize paying off the card with the highest interest rate first. This approach typically saves you more money in interest charges over time, though it might take longer to see visible progress.
Hardship arrangements
Many Australian credit card providers offer hardship programmes if you're struggling with repayments. These might include temporary payment reductions, interest rate freezes, fee waivers, or extended repayment terms. Contact your card providers directly to discuss available options - they're often willing to work with customers experiencing financial difficulty.
Debt management plans
Consider working with a free financial counsellor through the National Debt Helpline. They can help you negotiate with creditors, create a realistic budget, develop a structured repayment plan and understand your legal rights and options.
Using savings or assets
If you have savings earning low interest, using them to pay down high-interest credit card debt could make financial sense. Similarly, selling unused assets could provide funds to reduce your debt without taking on new credit.
Remember, the best solution often depends on your specific circumstances, including your credit score, income stability, and total debt amount. Consider consulting a financial advisor to determine which approach best suits your situation.
Credit24: How to get a personal loan to pay off your debt
Whether you need a personal loan to pay off credit card debt or want to consolidate multiple debts, meet Credit24. We’ll offer you a straightforward path forward. Here's what you’ll get:
Quick loans with simple online application
Fixed repayments known upfront
Debt consolidation in one manageable instalment
Loans customized to your needs and circumstances
Follow these simple steps to get started:
Use our loan calculator: Start by simulating your repayments to understand exactly what you'll pay.
Apply online (about 10 minutes). For that, you'll need:
Proof of identity
Recent bank statements
Proof of income
Details of your existing debts
Quick assessment and funding: If approved, you'll receive your funds within minutes, allowing you to pay off your credit card debt immediately and start fresh with a structured repayment plan.
Get a personal loan with Credit24
Remember, while using a personal loan to pay off credit card debt can be a smart financial strategy, it's important to combine it with good money management habits to avoid falling back into debt. Credit24 is here to help you take control of your finances with transparent terms and supportive service throughout your loan journey.
