Credit Card Consolidation Can Save You Thousands of Dollars as Personal Loan Rates Are at All-Time Highs

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Borrowers with good credit may be able to save thousands of dollars by consolidating credit card debt into a new loan. (iStock)

Making minimum payments on high-interest credit card debt is an expensive way to pay off your balances. Credit card interest accrues daily, which adds to the total cost of paying down debt over time.

A personal loan is a common way to consolidate credit card debt. This is a type of unsecured lump sum loan that you repay in fixed monthly installments at a lower interest rate. And since personal loan rates are lower than they’ve ever been, paying off credit card debt can save you more money than ever before.

In the fourth quarter of 2021, the average two-year personal loan rate set a new record high at 9.09%, according to the Federal Reserve. During the same period, the average credit card rate for interest accounts was much higher, at 16.44%.

Personal loan rates vs credit card rates

Keep reading to learn more about credit card consolidation and visit Credible to compare personal loan rates for free without affecting your credit score.

MILLIONS OF AMERICANS FEAR MISSING DEBT PAYMENTS, NY FED REPORTS

Despite Rising Credit Card Debt, Consolidation Is Cheaper Than Ever

Americans increasingly rely on credit cards as debt balances soar, says the Federal Reserve Bank of New York. Outstanding credit card debt rose 6.5% in the fourth quarter of 2021 as consumers added a record $52 billion to their balances.

Credit card debt, NY Fed

In an age of skyrocketing credit card balances, consolidating debt into a personal loan at a lower interest rate is more beneficial than ever.

A recent analysis estimates that paying off $10,000 in credit card debt with a two-year personal loan at a rate of 9.09% can save borrowers more than $4,000 in interest costs per compared to the simple minimum payment by credit card. By refinancing using this credit card repayment strategy, borrowers can pay off their balance 10 years faster by adding just $57 to their monthly payments.

Pay off $10,000 in credit card debt

It may also be possible to save money over time and lower your monthly payments by consolidating a longer-term personal loan. Keep in mind that longer personal loan terms usually result in higher rates, but you may still be able to get a lower fixed interest rate than what you’re currently paying on your credit cards.

The average fixed rate on a five-year personal loan was 12.65% for qualified applicants who took out a personal loan on Credible during the week of January 31. Paying off $10,000 of credit card debt under these personal loan terms can potentially reduce your monthly payment by $174 while saving you over $1,500 over the repayment period.

You can estimate your personal loan repayment terms on Credible for free and see how much you can save using a credit card consolidation loan calculator.

HOW TO GET A BALANCE TRANSFER CREDIT CARD

How to consolidate credit card debt with a personal loan in 5 steps

Using a personal loan for credit card debt consolidation can help you save money while paying off your debt in predictable monthly installments. Here’s what the personal loan application process looks like:

  1. Add up all your credit card balances. This will help you determine how much personal loan you need to borrow to pay off your credit card debt. You can consolidate the balances of one or more credit cards into one personal loan payment.
  2. Check your credit score. Since personal loans are unsecured and do not require collateral, lenders use your credit history to determine your risk and eligibility. Applicants with very good to excellent credit, defined by the FICO model as a credit score of 740 or higher, will see the lowest personal loan rates.
  3. Shop around for personal loan rates. Most lenders will let you see the terms of your loan, including estimated interest rates, with a soft credit check through a process called prequalification. You can compare personal loan rates from multiple lenders at once using Credible.
  4. Choose the best personal loan. When comparing offers, you need to consider the interest rate, origination fees, loan amount and loan term. Once you’ve chosen a lender, you’ll need to submit a formal application, which will require a thorough credit check.
  5. Use the loan to pay off your credit cards. If your application is approved, you will receive a personal loan the next business day. It can usually be deposited directly into your bank account. You can then use your personal loan balance to pay off your credit cards.

HOW TO CHECK YOUR CREDIT REPORT FOR FREE WITHOUT PENALTIES

Although your credit card balances may be reduced to zero, it’s important to avoid racking up more debt while you’re paying off your personal loan. You should always prioritize paying off your credit card debt in full each month to avoid paying interest.

You can learn more about debt consolidation loans from online lenders by visiting Credible. Also, browse the current personal loan interest rates in the table below to decide if this method of debt repayment is right for your financial situation.

BALANCE TRANSFER CARDS WITH 0% APR INTRODUCTORY PERIODS ARE DISAPPEARING QUICKLY

You have a financial question, but you don’t know who to contact? Email the Credible Money Expert at [email protected] and your question might be answered by Credible in our Money Expert column.

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