If you have credit card debt, you are in good company. Studies show that the majority of Americans have some form of credit card debt. And 14 million Americans have five figures or more worth of debt from credit cards alone. Have you considered taking out a personal loan to pay off credit cards? Personal loans often have lower annual percentage rates (APRs), meaning you’ll pay less on the money you borrow. Yet, there are also some drawbacks to using personal loans to eliminate debt from credit cards. For example, you may not qualify for a personal loan APR that is lower than the rate you pay on your credit cards.
In this guide, we will tell you all the pros and cons of using loans for credit card debt. Plus, we’ll give you tips for paying down credit card balances if you don’t qualify for an affordable loan. Keep reading to learn more.
In 2023, the average interest rate on credit cards is a little bit over 20%. This is an average, so some credit cards have lower APRs, and others have higher interest rates. On average, personal loans have lower interest rates than credit cards. In 2023, the average is around 10–20%. The exact rate you will pay on a personal loan depends on various factors, including:
Other factors, such as the term period on your loan and whether you take out a secured or unsecured loan, also play into your APR.
A personal loan is one of the best solutions for paying off credit card debt in 2023. This is especially true if you can find an affordable loan (more on this later). Benefits of using loans for credit card balances include:
These last two advantages only apply if you use your personal loan to pay off all your credit cards. We don’t recommend taking out a loan to pay off one credit card if you carry debt on multiple lines of credit.
Of course, all these benefits can not come without some drawbacks. The following disadvantages of personal loans could make this option less attractive for certain borrowers:
The first two issues primarily occur when you have no credit, poor credit history, or a low credit score. The third con happens when people use loans to pay off debt but continue using their credit cards while paying on the loan. Luckily, financial institutions like First Financial offer personal loans for people with poor credit.
So, what if you do not qualify for an affordable loan? In that case, the goal is to pay down your credit cards as quickly as possible. Why? The faster you pay down your debt, the less you forfeit in interest. Here are the top ways to do just that.
The first thing you should do is stop swiping. Use credit cards for emergencies only until you pay off your debt. Also, start thinking about what you will use your credit card for once you pay off your debt. Experts recommend reserving credit for the following big-ticket purchases only:
Often, larger credit card purchases come with interest-free periods. For example, you may have six months to pay off your purchase before you’re charged interest.
As we mentioned, credit card debt is extremely common in the US. Financial experts have come up with many strategies for eliminating credit card debt quickly. Some of the most effective strategies are:
You can also come up with your own debt-canceling strategy based on your unique needs. The best strategy for you is the one that gets your balances paid down the fastest.
Another idea to consider is a balance transfer. Many credit card companies allow you to transfer all your outstanding credit card debts to a single account. Often, balance transfers also come with a preliminary grace period where you don’t have to pay any interest on your balance. However, you may have to pay a fee on the balance you transfer. So, this solution may not be best for people with significant credit card debt.
Taking out a personal loan to pay off credit cards can be a great way to get out of debt. But keep in mind that some people may not qualify for a personal loan without a good credit history. Are you searching for a personal loan you can qualify for? First Financial is on a mission to provide personal loans to borrowers just like you. Click here to get started on your loan application!
In 2023, the average credit card holder pays an APR of 23.39%. According to LendingTree, that is the highest APR recorded since at least 2019. But what is APR exactly? And how do you secure a loan or credit card with the lowest possible APR? We will explain the answers to these questions and more in this complete guide to how APR works.
APR stands for annual percentage rate. In simple terms, it is the total cost you pay to borrow money. APR applies to both credit cards and loans, but how you calculate credit card APR vs. loan APR differs. Credit card APR is simple to calculate. It is equal to the interest rate a lender charges you for carrying a balance on your card. If you pay off your credit card in full each month, you do not have to pay interest. Loan APR is different. It equals the interest rate on the borrowed amount plus any additional costs. These costs may include lender fees, broker fees, and other fees that depend on the loan type.
Interest rates may help determine APR, but how do lenders determine the interest rate on a particular loan or credit card? Aside from prime rates and funds rates, lenders also consider the prospective borrower’s creditworthiness.
If you want a better rate on your next loan or credit card, pay attention to the following important factors.
Someone’s credit score is an excellent indicator of their credit history. And lenders will base their beliefs about your ability to repay a loan on your past behaviors. In general, there are five factors that go into a credit score:
Payment history and credit utilization are the most important factors here. Combined, they make up 65% of your total credit score. New credit and credit mix make up the lowest percentage of your score at 10% each.
DTI stands for debt-to-income. It is a ratio of an individual borrower’s monthly debt payments to monthly income. Lenders use this ratio to identify how much debt a potential borrower can afford to take on. For example, say you pay $2,000 per month on your credit card, mortgage, and auto loan combined. Say you also bring in $3,000 per month. In that case, your DTI equals about 66.7%. In 2023, lenders typically prefer a DTI of 36% or less. The highest DTI most lenders will accept from prospective borrowers is 43%.
Some lenders charge higher interest rates based on the type of loan. In these cases, the higher rate is not necessarily due to the borrower’s creditworthiness or lack thereof. It is due to the bank’s perceived risk. For example, secured loans naturally have lower interest rates. Secured loans include auto loans and home loans (mortgages). We call them “secured” because the lender can take your home or car if you default on the loan. On the flip side, unsecured loans tend to have higher interest rates to offset the lender’s risk. Risk on unsecured loans is higher because the lender has no way to make up for its losses if you default. Unsecured loans include personal loans, payday loans, and other loans for which you do not need collateral to qualify. Credit cards are sometimes considered unsecured loans, too.
When you take out a new loan or line of credit, your documents may include multiple types of APRs. Each of these APRs may have a different rate, too. Confused? You are not alone. Learn more about the most common types of APR you may come across.
Purchase APR is the interest rate you pay on individual purchases. This type of APR only applies to credit cards. Cash advance APR also applies to credit cards only. It is the interest rate you pay when you use your credit card to take out cash.
Introductory APRs are common with many credit cards. You get a low, often free interest rate for a preliminary period after you open a new line of credit. Some credit cards also come with promotional interest-free purchase periods. For example, spending a certain amount can trigger a promotional APR. You do not have to pay interest on the purchase until the promotional period expires.
Penalty APRs can apply to both loans and credit cards. This APR is typically higher than your regular interest rate and fees. You may have to pay this higher rate if you are delinquent for more than 60 days.
Variable and fixed APR typically applies to loan rates. A fixed APR loan has an interest rate that does not change over time. Variable APR loans have interest rates that do change throughout your loan term. The APR on a variable-rate loan depends on the prime rate in the US. The Prime rate is the benchmark lenders use to set interest rates on credit cards and loans. The US prime rate is based on the Federal Reserve’s funds rate. The prime rate is 7.75% as of this writing. To see how much variable interest rates can fluctuate, consider the prime rate this time last year. The rate was 3.25% at the beginning of 2022, more than a 2x increase year-over-year.
So, what is APR? APR stands for annual percentage rate, and it is the total amount you end up paying when you take out a loan or line of credit. The APR you must pay depends on your credit score, debt-to-income ratio, and more. Do you have low creditworthiness? If so, you may be searching for a provider to help you qualify. Learn more about First Financial’s product offerings for borrowers like you and apply today!
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