Personal loans and credit card debt

Credit cards are for short term lending

Credit cards can be a great option for short-term lending, but high-interest rates make them a costly way to borrow money long term.

Personal loans are better for borrowing long term

A personal loan typically has a lower interest rate and a structured payment plan to prevent further accrual of debt.

Consolidating your credit card debt can save you money

Because the interest rate on a personal loan is typically lower than a credit card's, using a loan to consolidate your debt can lower the amount of interest you pay over time.

Important Points

• While credit cards are appealing because of the payment ease and rewards they offer, they only really work in your favor if you’re able to pay the balance in full every month.
• If you don't pay on time, interest and fees can quickly become overwhelming. 
• Even if you're paying your credit card bills on time every month, you may still be increasing your debt load due to your credit card's interest rate. 
• Transferring a persistent credit card balance to a personal loan can help stop the bleeding. If the interest rate on the loan is lower than on the credit card, then your monthly interest payments will be lower.

 Pros

• Personal loans offer a steady interest rate that is typically lower than a credit card APR.
• Personal loans allow you to budget for a set amount due each month.
• Personal loans can raise your credit score over time by lowering your credit card utilization rate. 

Cons

• Personal loans require discipline: missed payment penalties can be higher than those for a credit card.
• While paying your credit card off with a personal loan may increase the available credit on your credit card, if you continue to spend on that card, you may end up in more debt than you started with.
• Getting a personal loan with a low-interest rate can be difficult if you have a low credit score.

A note on balance transfers

An alternative to a personal loan is a balance transfer credit card, but there are some key differences to be aware of. 

• Balance transfer cards allow you to transfer the balance of one credit card to another credit card, typically one with a lower interest rate. 
• They usually charge an upfront fee of about 3%. 
• For some balance transfer cards with an introductory rate, if you don't pay the balance transfer down before the period is up, they may charge you interest retroactively. Be sure to read the cards terms. 
• For those seeking to raise your credit score by lowering your utilization, some credit scores formulas calculate your score on both total and per-card utilization. If you transfer the balance to a card and it nears the limit, this may not have the positive effect on your credit score. 
• Overall, balance transfers cards may be a good option if you are sure you can repay it in full before the introductory period ends.