How to tackle Credit Card Debt with Personal Loans?
Credit cards make convenient payment tools for dining, travel, shopping, and entertainment purchases in Singapore and worldwide. From students to businessmen, everyone has a credit card or 2 to pay for their expenditure. Credit cards offer excellent benefits in the form of air miles, reward points, cash rebates, and vouchers to help you save money on your purchases. However, with every swipe that you make, you are also incurring a credit card debt when you fail to make monthly card payments.
What are the different ways to tackle your credit card debt?
Listed below are some of the easy ways to get rid of your credit card debt:
- Pay more than the minimum amount: Making minimum monthly payments on your credit card bills keeps the interest rate from rising. Minimum monthly payments cover only the interest and not the principal amount of your credit card debt. Pay more than the minimum amount every month to clear your credit card debt slowly and effectively.
- Make more than one monthly payment: You can make 2 or 3 minimum monthly payments to chip away at your credit card debt faster. Making just one minimum monthly payment will keep you from defaulting but it doesn’t help you make a dent in your credit card debt. When you make minimum monthly payments, you are only paying the interest due on your card and not the principal amount.
- Get rid of the debt with the highest interest rate first: Pay off the credit card debt with the highest interest rate first. If all the credit card debts have more or less similar interest rates, then clear the lowest debt amount first while making minimum monthly payments on the rest. Repeat the process to get rid of all your credit card debts.
- 0% Balance Transfer Plans: Transfer your credit card debt to a lower interest card or a 0% Balance Transfer card. While opting for a balance transfer credit card, ensure the 0% interest rate lasts longer and the transfer amount is suitable to your needs.
- Budgeting: Track your spending and find ways to minimise it. Budgeting can help you minimise your credit card debt. Even after clearing your debt, stick to the budget. Avoid using your credit card for purchases while paying off your debt.
- Emergency fund: If you have set aside an emergency fund, you can use that to clear your credit card debt.
- Liquidate your assets: If your credit card debt is higher than you imagined, to avoid making high interest payments and never reaching the finish line, as a last resort you can liquidate your assets to pay off the debt.
- Negotiate: If the credit card debt is too high to clear, then talk to your credit card company and convince them to offer you a lower interest rate given your financial situation.
How to use personal loans to clear your credit card debt?
One other way of clearing your credit card debt is to take a personal loan. Borrowing more money to pay off a debt sounds redundant. However, when you obtain an unsecured loan for a lower interest rate to pay off your credit card debts this method sounds logical. Things to consider when taking a debt-consolidation loan:
- Interest rate: Ensure the interest rate of the loan is lower than the credit card rate. After clearing your credit card debt, you only have to pay single EMIs on your loan with a lower interest rate.
- Loan amount: Most unsecured loans are not enough to pay off huge credit card debts. When choosing a loan, ensure you choose the one that offers enough money to pay off all your credit card debt in one payment.
- Spare cash: After paying off your credit card debt, you may be left with some money to spare each month as there is no longer a need to make monthly card payments. This money should be used to repay the loan and also build an emergency fund.
- Credit score: After paying off your credit card debt, keep the credit card account open to retain your credit history and credit score.
- Loan tenure: Borrowing a loan with a longer repayment period may hurt your finances in the long run. Choose to pay higher EMIs for a shorter period of time.
Pros and cons of taking a personal loan to clear your credit card debt
Following are the advantages and disadvantages of using a personal loan to get rid of your credit card debt:
|Lower interest rate on your loan in comparison to the higher interest you pay on your credit card.
||Not all lenders offer lower interest rates on loans. Therefore, it is imperative that you carefully consider all avenues before applying for a debt-consolidation loan.
|Single payment to clear your debts instead of the monthly minimum payments you have to make to cover both your credit card bills and debts.
||Habits can be hard to break and cardholders may not change their spending pattern after paying off their credit card debt. Racking up another credit card debt with unbreakable spending patterns can be a disadvantage.
|Single EMI: Less hassle when you have to repay only one debt (loan) instead of sorting out a number of credit card debts by their interest rates and deciding which one to pay off first.
||Closing your credit card account can affect your credit history and credit score. Therefore, keep your credit card account open after bringing the balance down to zero. Ensure you don’t use the card for unwanted spending.
When do you use a personal loan to clear your credit card debt?
Personal loans can come in handy when you need to clear the outstanding dues on your credit card. However, the final decision lies in your hands. You can clear a credit card debt using a personal loan when you want to:
- Consolidate all payments into one.
- Opt for lower interest rates.
- Make single monthly payments.
It is advisable to consider all avenues before deciding on the right method to clear your credit card debt. It is also imperative that a cardholder tracks his or her spending pattern, create a budget, and stick to the budget to prevent racking up more debt in the future.