If you have high interest credit card debt then debt management can be a real problem – especially if you owe several thousands of dollars. And you’re not alone. The biggest majority of Americans are in debt according to a report from the Pew Charitable Trust. In fact, 80% of Americans are carrying debt and 39% of us report that they have unpaid credit card balances. Plus, there is a cost to carrying high interest credit card debt beyond just the interest cost. This can also have a negative effect on your credit score, which means it will cost you even more to borrow money going forward.
If you’re carrying high-interest credit card debt you do have several options for better debt management. The first is to get a personal loan and the second is to do a credit card balance transfer. There are six things you need to weigh before deciding which of these would be best for debt management. They are:
The balance transfer fee
When evaluating a credit card balance transfer it’s important to learn if there will be a transfer fee. Many of the balance transfer credit cards have a one-time fee of 3% to 5% of the total you’re transferring.
As an example of this, suppose you would like to transfer $5000 to a balance transfer card that offers 12 months’ interest-free. The new card could hit you with a fee of $150-$250. While this might seem high it could still be cheaper than the interest you would pay on a 12-month personal loan at 11%. That personal loan would actually cost you around $300 in interest.
Of course, your goal should be to pay as little interest as possible and an online debt consolidation calculator would help you determine which option would cost the least.
The interest rates
Speaking of interest rates, they are the first and most important thing you should look at when comparing personal loans and a credit card transfer. While a balance transfer card would give you an interest-free period you need to know what will happen when its introductory period ends before you make a decision.
In general, the interest on a personal loan will be lower than the interest on a credit card and this is especially true if you have good credit. According to Bankrate’s national survey of banks and thrifts, the average interest rate on a personal loan is 10.94%. In comparison, the interest rate on a credit card averages a variable 16.05%.
In addition, if you fail to pay off your balance before your introductory period ends you may be required to pay interest retroactive to the day you opened the account. And if this happens it’s almost certain that you’ll have higher payments than if you had chosen a personal loan.
The origination fee
If you choose to do debt management with a personal loan online there will likely be a loan origination fee. This is a one-time fee that is subtracted from the total amount of the loan you receive. These fees can be as high as 6% of the loan. For example, if you took out of $5000 loan to consolidate credit card debt you might get just $4700 because of a $300 origination fee that had been deducted from your loan. The fee is usually included as part of the annual percentage rate which. would at least allow you to make a fair comparison between online loans.
In comparison, banks and credit unions generally do not charge an origination fee for personal loans.
The length of the introductory period
Another key consideration in debt management is how long the 0% introductory period will last. Suppose you owe $5000 you want to pay off and you choose a card with a six-month, no interest introductory period. You need to ask yourself if six months would be enough time to pay off the $5000. If not, you might want to consider a personal loan.
Given the example of $5000 with an interest-free introductory period of six months, you would need to pay $833 a month to clear the debt at 0% interest
Questions you need to ask
There are three key questions you need to ask yourself this point.
1. What’s the total amount of your credit card debt?
2. What’s your interest rate?
3. How much of a payment can you afford to make?
A payment schedule and a fixed rate
One of the biggest advantages of a personal loan is that it has a fixed rate and a fixed payoff date. This makes it very predictable way to achieve debt management. A credit card might have a great rate initially but if you don’t do a good job of managing it you could find yourself paying more for a longer period of time than if you had chosen a personal loan. On the downside, a personal loan doesn’t offer the same degree of flexibility as a balance transfer. If you were to run into a financial emergency so you couldn’t make that $500 payment on a personal loan, you could be in even bigger trouble. But with the flexibility offered by a balance transfer card you could pay less than the $500 until you got back on your feet. You could also negotiate with the card issuer to get your interest rate reduced.
If you weren’t aware of this when you take on revolving debt – that balance transfer card – it could harm your credit score. But when you take out a personal loan that could actually improve your score. This is due to a thing called credit utilization which is the amount of credit you’ve used (utilized) vs. the total amount you have available. If you were to get a balance transfer card and transfer all of your credit card balances to it, your credit utilization ratio would go to nearly 100%, which would damage your score. However, if you take out a personal loan to consolidate your debt this could actually lower your utilization ratio to zero, which would improve your score.
Personal loans and balance transfers have several things in common. First, either would simplify your life because instead of having to make multiple payments a month at different due dates, you’d have only one payment to make and one due date a month. Second, you would save money because a personal loan will have a lower interest rate than the average of the interest rates you’re currently paying and, of course, a 0% interest balance transfer card would have no interest charges at all. However, as you have read each has its own pros and cons. You will need to weigh them carefully and then choose the one you feel would be best for you.
There are other ways to manage debt beyond a personal loan or balance transfer. Watch the following video to learn what they are and how they could help.
Frequently asked questions about personal loans
Q. What is the best bank for a personal loan?
A. The best bank for a personal loan isn’t a bank. It’s an online lender. This is because online lenders like Lending Club, Peerform and Prosper can offer much lower interest rates than banks or thrifts because they eliminate the middleman – the money comes directly from lenders to you.
Q. Are there personal loans with no credit check?
A. Yes, it’s possible to get a personal loan where there is no credit check. There are several online lenders that will not check your credit and that offer competitive interest rates but will have a fee. Also, most payday lenders don’t require a credit check.
Q. Can I get a personal loan without collateral?
A. The answer to this is also yes. In fact, personal loans are always unsecured loans meaning that you wouldn’t have to use any asset as collateral. Mortgage loans and auto loans are examples of loans that do require collateral.
Q. Could I get a personal loan with a low credit score?
A. There are personal loans available online for people with low credit scores. However, the interest rates are probably going to be too high for them to make any sense when you’re trying to pay off your debt and save money.
Q. Could I use a personal loan to pay off student loan debts?
A. Using a personal loan to pay off student loan debts is a very common practice. This can be an especially good option if you have high-interest, personal student loan debts or even high-interest federal student loan debts. Interest rates for personal loans are currently at almost all-time lows so now would be a really good time to consider a refi.
Q. How does a personal loan compare with a line of credit?
A. Personal loans are for a fixed term at a fixed amount. For example, you might get a personal loan for $3000 for three years with a fixed monthly payment of $275. Personal lines of credit also have a fixed amount but you access the money when you wish by using special checks or by requesting a transfer of funds to your checking account. These loans are also unsecured.