How to Pay Off Credit Card Debt
If you re searching for ways to pay off debt, you re not alone. In fact, millions of Americans find themselves in this situation every year. Luckily, there is a fairly simple answer: debt consolidation.
Debt consolidation is a financial strategy in which you combine multiple high-interest debts into one loan with a single monthly payment. Ideally, you ll also end up with a lower interest rate. The process typically involves getting a debt consolidation loan or a personal loan, using the funds to pay off existing debts, and then repaying the loan.
Most lenders only offer debt consolidation options for unsecured debt, so these loans are specifically designed to help you pay off credit card debt. You can also use debt consolidation loans for other forms of debt, like store cards and medical bills.
For example, you might have debt from three different credit cards as well as unpaid bills from a recent hospital stay. Generally speaking, the best way to pay off credit card debt like this is by getting a debt consolidation loan. This loan provides you with the funds to pay off each of your individual debts. Then, you just have to manage your monthly loan payment.
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What Are APRs, Rates, and Terms on Debt Consolidation Loans?
When you re shopping around for a loan to pay off credit cards, you ll want to consider each loan s interest rate, APR, and term to decide which option is best for you. The interest rate is the percentage that the lender charges you for borrowing money from them. Most debt consolidation loans have fixed interest rates, meaning you have a set monthly bill.
Meanwhile, the APR (annual percentage rate) combines your interest rate with the fees, charges, and payments that determine the loan cost each year. The lower your APR, the less you ll pay over time. The APR is the most important factor when shopping around as it gives you an overall understanding of the loan cost rather than focusing on interest alone.
The loan term is the period of time during which you ll repay the loan. Terms on debt consolidation loans usually range from two to seven years.
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Benefits of Getting a Loan to Pay Off Debt
Debt consolidation loans have a variety of benefits, and the most important one is your potential savings. These loans usually have lower interest rates than credit cards, so by paying off high-interest credit card debt with a loan, you save money on interest.
This also allows you to pay off credit card debt sooner, as more of your money is going toward the principal amount. Plus, you can put the money you save in interest toward your loan, allowing you to pay the loan off even faster.
It s also worth noting that a debt consolidation loan is usually much easier to manage than having multiple debts. Instead of paying several bills each month, you pay just one.
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Disadvantages of Using Loans to Pay Off Debt
While debt consolidation loans can be very useful, there are some downsides to consider. First, they re still loans, so you ll need to stay on top of monthly payments. If you fail to, you could face late fees and potential hits to your credit score.
Getting loans to pay off credit cards can be difficult if you have a poor credit score. Many lenders require that you have a score of 630 or higher in order to qualify. If you re already late on your credit card payments, you might have a poor score and have a hard time finding a lender that will approve you.
When Does Getting a Loan to Pay Off Debt Make Sense?
With the above pros and cons in mind, here are a few scenarios in which debt consolidation loans could be the right choice:
- You are juggling several types of debt.
- You are struggling to manage multiple bills each month.
- Your credit score has improved enough to earn you a lower interest rate than that of your current debts.
- Your monthly debts, including your mortgage or rent, are less than 50% of your monthly gross income.
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FAQ
Will getting a loan to pay off credit cards affect my credit score?
Just like with any other type of loan, applying for a debt consolidation loan will have a temporary effect on your credit score because the lenders have to run a credit check. This allows them to determine your creditworthiness. However, this is typically a short-term impact that s easy to rebound from.
What s the best way to pay off credit card debt?
The best way to deal with debt depends on your personal situation. The amount you owe, your financial history, and the terms you re looking for all play a role in the best choice for you. Once you have a clear understanding of these elements, you can review options from each provider to make the right choice.
How can I find the debt consolidation loan that s right for me?
Regardless of how you decide to pay off debt, it s always important to consider all options and shop around with different companies. You can compare loans and programs by using Fund.com and getting quotes from the industry leaders above.
Do I have to get a loan to pay off credit card debt?
No. There are a variety of ways you can pay off debt, including free debt counseling services. You can use various techniques to try to pay it off on your own, like the debt snowball method.
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