Paying down debt on a credit card with a high interest rate can sometimes feel never ending, especially if a fair portion of your repayments is being absorbed by interest charges and not making much of a dent in the balance owing.
Minimising these interest charges by reducing your interest rate could give you the opportunity to get on top of your debt once and for all.
Since personal loans generally offer lower interest rates than credit cards, you may be wondering whether you might be able to take out a personal loan to pay off a credit card.
Fortunately, you can. And in addition to a reduced interest rate, there are other ways a personal loan might be able to help you pay off your debt.
How could a personal loan help me minimise my debt?
Using a personal loan to pay off your credit card won’t clear your debts for you. But there are ways in which it might make managing your debt a little easier, including the following:
1. A personal loan repayment schedule has a definitive finish line
A credit card is a form of revolving debt that allows you to spend and make repayments as you like, as long as you are meeting your minimum repayments each month. This means that unless you stop using your card altogether and start focusing on paying down the balance, you could find yourself paying it off indefinitely.
In comparison, a personal loan is a type of instalment debt whereby a once-off lump sum is paid to the borrower, who is then responsible for repaying it (plus interest charges) in predetermined monthly instalments for a set period of time. This requires the borrower to stay on top of the debt by actively paying it down by the end of the loan term.
An added bonus to paying your debt off within a set time frame is that you’ll likely also minimise the total amount of interest you’ll pay.
2. A personal loan won’t allow you to add to existing debt
As long as you close your credit card account once you’ve used your personal loan to pay it off, you’ll no longer have the risk of being tempted to make unnecessary purchases and add to your existing debt. Often, it’s these kinds of purchases that can make it seem impossible to make a dent in your debt.
3. A personal loan’s set repayments can be automated
When your credit card bill comes in each month, you’re responsible for making at least the minimum payment amount by the due date specified on the bill. To an extent, this relies on your memory, making it fairly easy to forget and end up with a late fee and a negative event recorded on your credit file. Unless of course you put a system in place to remind you each month.
Personal loan repayments, on the other hand, can be automated, so that the amount payable comes straight out of your account each month. It can also be easier to budget for, as the payments are typically the same amount each month. Just remember that if your personal loan has a variable rate, you’ll need to budget a little extra in case of an interest rate rise.
What other options should I consider?
Before you get started on your personal loan comparison, it’s worth considering your other options.
A balance transfer credit card
A balance transfer is the process of moving the balance of your existing credit card to a new card that offers an interest free period on the transferred amount. If you are confident that you’ll be able to pay off the balance before the end of the interest free period, a balance transfer credit card could give you the breathing room you need.
But keep in mind, once the interest free period ends, you’ll have to start paying interest on the total balance remaining. Plus, the interest free period doesn’t apply to any additional purchases you make with your new card. So, if you do opt for a balance transfer, it’s a good idea to have a solid plan in place.
Reduce your credit limit
If you’ve managed to pay down your credit card and have excess available on your limit, you could consider asking your credit provider to reduce your credit limit, so you’re not tempted to use it to make more purchases.
Talk to a financial counsellor
Remember, if you feel you are in a debt spiral that you’re struggling to get out of, there is help available. You can access free financial advice by reaching out to the National Debt Helpline.