Should I Use a Personal Loans to Pay off Credit Card Debt?

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by John Ulzheimer

creditCardsI’ve been asked a thousand times what is the best way to get out of credit card debt.  My first response is always, “write a big check.” And while that answer might sound absurd you’d be surprised to learn how many people have the savings sufficient to pay off credit card balances but are choosing not to do so. Never mind the fact that they’re earning less than 1% in a savings account while paying, on average, 13 to 15% interest annually on the credit card debt.

How much interest are you paying on your credit card debt? Visit here to find out today and start managing your money and credit.

One of the lesser discussed options to get out of credit card debt is the use of a personal loan. A personal loan, sometimes referred to as a “signature loan”, is an unsecured installment loan. They’re offered by most reputable lenders and can be as small as a few thousands dollars and as large as 6 figures, depending on your income.

The money you receive from a personal loan can be used for anything you like. You can take it to Vegas, pay for a car, give it to a friend, pay for tuition, pay for a vacation, or it can be used to pay off credit card debt.

This is a “borrowing from Peter to pay Paul” approach to getting out of debt. If you borrow $10,000 to pay off $10,000 then you’re still in the exact same amount of debt. Having said that, that’s really where the similarities end.

Credit card debt is revolving debt. Revolving debt is much more damaging for your credit scores than installment debt. The infamous ratio called “revolving utilization”, which is very important in your credit scores considers only revolving debt, and not installment debt.

If you’re able to pay off credit card debt with a personal loan you’ve converted revolving debt to installment debt. And, your scores probably just went up, and went up considerably if you significantly lowered your revolving utilization in the transfer.

Rate to rate there probably won’t be much of a difference. Rates in personal loans are not usually much better than those on credit cards, although there are some exceptions. The better your credit the better your deal from the personal loan lender.

The key to using personal loans to pay off credit card debt is to not close the credit cards and not get back into credit card debt. If you get back into debt twice over your options “the next time” are much more limited.

How much interest are you paying on your credit card debt? Visit here to find out today and start managing your money and credit.

JRU on 60 Mins SetCredit Reporting Expert, John Ulzheimer, is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.

by John Ulzheimer 04/03/2013

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