Credit Cards

Should I Consolidate My Credit Card Debt With a Personal Loan?

EPF Last Update: May 23, 2020

With U.S. credit card debt currently sitting at 830 billion, the figure has surpassed the highs we saw during the 2008 financial crisis. And with borrowers increased appetite for credit card debt, commercial banks and savings institutions earned an estimated 108 billion in credit card interest in 2018.

To avoid adding to the pile, consider consolidating your credit card debt with a personal loan.

While average credit card interest rates currently sit at 16.88% – with major banks offering annual percentage rates (APRs) ranging from 14.24% to 28.24% – personal loans provide a pathway to reducing your interest costs. With APRs ranging from 5.99% to 35.99%, several lenders offer reliable solutions – even to those with bad to fair credit.

Is Credit Card Consolidation Right for Me?

I most cases, yes. Considering the lowest credit card APR among institutions we surveyed was 14.24%, consolidation can often lower your interest rate and decrease your out-of-pocket costs.

As well, consider the variable nature of credit card APRs. As the Federal Reserve increases and decreases its federal funds rate, credit card interest rates follow suit. Conversely, with a personal loan, your interest rate is fixed. This means your APR and monthly payments remain constant throughout the life of the loan.

Similar to credit cards, personal loans also offer flexible repayment terms. While duration range from a few months to several years, you’re able to repay the balance at any time without penalty.

How Do Lenders Determine My Personal Loan Interest Rate?

When sizing up borrowers, lenders determine your interest rate by assessing your credit profile. If you have a high FICO or Vantage Score, you can expect to receive the lowest rate. Conversely, if your credit score falls at the low-end, you can expect to receive a higher rate.

But keep in mind, due to 2019 changes in credit reporting, Experian Boost incorporates utility, phone and TV bill payments into its scoring model to assess a borrowers overall creditworthiness. Similarly, UltraFICO analyzes your checking, saving and money market account behavior to better assess your credit risk.

While both programs are voluntary, they can boost your reliability in the eyes of lenders and help you obtain more favorable loans terms. For a detailed breakdown on how to apply, check out our full article on Credit Report Changes in 2019.

How Much will I Save if I Consolidate with a Personal Loan?

To see the cost-savings in action, let’s use an example.

Say we apply the current average credit card interest rate of 16.91% to a $10,000 balance that’s paid-off over 3-years. In this scenario, the debt requires a payment of roughly $356 per month. Now, if we take the same balance and consolidate it with a personal loan APR of 10% – the payment works out to roughly $323 per month.

By reducing your APR by 6.91%, your payment declines by $33 per month. More importantly, over the entire life of the loan, you save $1,188 in total interest costs.

While the numbers depend heavily on your finalized interest rate, even small reductions in your APR can result in significant cost-savings over time.

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