Should you get a personal loan to pay off credit cards?

[Aug 12, 2011.]

 

A recent Rebuild.org article focused on how U.S. consumer debt rose $15.5 billion, or 7.7 percent, to $2.446 trillion in June, the highest monthly increase in four years. Revolving debt, which includes credit cards, rose to $798.3 billion from $793.1 billion in May as more people seem to be borrowing money to pay for expenses such as groceries and gas.

Using a debt loan?

When you use a credit card to pay for household expenses your debt total can quickly spiral out of control. So when does it make sense to use a personal loan to pay off credit card bills? Consider some of the following points when choosing whether to get a debt loan.

• Credit card debt usually has a higher interest rate than personal loans. So there's a good chance that if you can qualify for a loan, you'll be able to shave something off the overall monthly payments. Of course you'll need a high credit score to qualify for the lowest loan rates. But even if you aren't at the top of the scale and can get a loan, you should see a decrease in interest being paid out.


• It's a bad idea to consolidate debt with a loan unless you have steps in place to change poor spending habits that contributed to the debt. Otherwise you may be tempted to spend more money on credit cards, making your financial situation even worse.


• It is important to shop around and compare loan deals. Not only can interest rates vary from lender to lender, but terms and conditions can vary, too. Do an apples to apples comparison of personal loan offers to make an informed decision about borrowing money.


• Do not borrow a personal loan if you cannot afford the monthly payments. You'll need to begin paying back the loan after receiving it so make sure you have enough income to cover your bills.


• It is important to pay more than the minimum monthly payment on a loan if you really intend to make a dent in the balance. Review the loan amortization schedule to see how much of the monthly payment will actually go toward the principal. Add extra to your principal payments each month to knock down the balance.

A useful financial tool

Get all the facts you need before applying for a loan. Paying off debt with a loan is something that should be considered cautiously so you don't make a mistake that can make your financial situation worse.

 

About Author:

Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.