Britons owe an eye-watering seventy-two billion pounds on credit cards. Every household in the UK now has an average of over two and a half thousand pounds unpaid on credit cards.
If you’re not careful, this can be one of the most expensive ways to borrow. Bury your head in the sand, and you could well be paying more interest than you have to.
It’s time to consider taking out a loan to pay off credit cards that have a balance you’re unable to pay off in full. Here’s why.
All About Personal Loans
A personal loan gives borrowers access to funds to use at their discretion. They can often be unsecured. That means they don’t require you to put down any assets for a loan company to take from you if you were to default on the monthly payments.
Personal loans are one of the ways that you can consolidate credit card debt. What does that mean exactly?
Let’s say you owe money on several credit cards. You may find you are having trouble paying off the balances in full. You may also be struggling to remember when to make the minimum payments each month.
Added to this, even if you do make the minimum payments on your cards, you could be paying far more interest than you need to on the outstanding balances.
A personal loan may well give you a lower rate of interest than any of your credit cards. What debt consolidation allows you to do is use the loan to pay off all your cards at once.
You would then have reduced your monthly payments to one single payment and potentially at a lower rate of interest. This is going to make your life simpler and have a less detrimental impact on your hard-earned cash.
The net result could be that it both saves you money and gets you out of debt more quickly.
Using Loans Responsibly
It could be that you have got into debt on your credit cards because you’ve been overspending. This could be due to a one-off purchase, or it may be due to bad spending habits that have crept up on you gradually.
Whatever the cause of your debt, it’s very important to sit down calmly and work out where things have gone wrong. You’ll need to make a new plan and a new budget for the future.
To coin a familiar saying, you’ll need to cut your coat according to your cloth. In other words, the aim would be to live within your means from now on.
The Purpose of the Loan
If you decide to consolidate your debt with a loan, there are some very important things to bear in mind.
You must use the loan to pay off the cards. You may see your bank balance looking a bit healthier once the loan is paid into your bank account. Do not be tempted to use this as an excuse to go out on a shopping spree.
If you do, all that will happen is that you run up even more debt. Once you have cleared the debt on your credit cards, take a moment to reflect. Do not be tempted to start using them again in a way that’s going to run up yet more debt.
If you do, you may find yourself repeating the situation you have just got yourself out of. The danger is that the next time you might not be able to get another loan to pay off your credit card debt.
It may be that you have a very good credit history. You might also just have one or two credit cards on which you owe money. In this instance, it may be better to pay off your cards with a balance transfer by taking out another credit card.
Many offer excellent rates of interest as an introductory offer. The key thing to watch out for is when that rate ends. That way you can move the balance again before the new and higher rate of interest kicks in.
If your credit rating isn’t high enough to qualify for a low introductory APR, then a personal loan may well be the better option. Your goal should always be to get a lower interest rate than the one you currently pay on your credit cards.
Plan Ahead with Your Loan to Pay off Credit Cards
The interest rate on your personal loan may be lower than your credit card rates. However, you may be locked into a set of monthly payments for a specific period of time.
It could be that your monthly payment on the loan is higher than the combined total of the monthly payments of the credit cards you’re paying off.
Remember though that the faster you pay back the loan, the less interest you are likely to pay. You just need to be careful that you can make the monthly payments on the loan without too much stress.
The worst thing you can do is default on a payment. This acts as a big red flag to lenders. For them, it is always about risk. If you miss a payment it will very likely have a negative effect on your credit score.
Read the Small Print Carefully
Watch out for any charges that might be added to your loan. These could be things like arrangement fees. You could end up paying on interest on these too if you’re not careful.
Check to see if there are early repayment costs. You may know you are about to get a bonus, for example. If you want to make extra payments in the future, you need to be sure that you won’t suffer any penalties for doing so.
A Brighter Future
Taking out a loan to pay off credit cards can give you peace of mind. When you have lots of debts on different cards, it can be hard to manage and very stressful.
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