Should you take out a loan to pay off your credit card?

During the recent lockdowns many consumers were able to use their unexpected extra disposable income to repay credit card debt, but for others the boredom of being housebound resulted in them racking up credit card debt.

As the end of the year approaches, now is the perfect time for those who have seen their outstanding credit card balances increase over the past 20 months to take steps to clear their credit card debt. For many a personal loan can be a good way to pay off credit cards, but this option is not best for all borrowers. Here we take a look at the benefits of taking out a loan to pay off a credit card debt and the alternative options available.

Taking out a personal loan is often a good way to clear credit card debt as the average interest rates on personal loans are usually lower than those on credit cards, helping to make repaying the debt cheaper and quicker.

For example, the average interest rate on a personal loan at £5,000 at the beginning of this month was 6.8%, while the average rate for those looking to take out a personal loan of £7,500 was 4.4%. This compares to the average purchase rate on a credit card of 26.3% APR.

In addition to this, a personal loan requires borrowers to make set repayments per month with a clear timeframe as to when the debt will be repaid. Meanwhile, although credit cards require a minimum repayment each month, just keeping to this minimum amount will normally take much longer to repay the debt.

A personal loan can often be a good option for borrowers with credit card debts with various lenders as they can consolidate the debt into one personal loan. This not only makes the debt more manageable but, again, usually means that the borrower is paying a lower interest rate on the debt.

Credit card borrowers with a small amount of debt may find it is a better option to use a 0% balance transfer credit card than a personal loan to clear their debt.

A 0% balance transfer card will offer an interest-free period when an outstanding credit card debt has been transferred to the card. This means that borrowers have a period, which can be as much as 30 months, to repay the debt without incurring any interest.

Interest is usually then added to any outstanding balance once the interest-free period ends.
Borrowers considering this option should be aware that many 0% balance transfer credit cards will charge a transfer fee when balances are moved to the card.

As well as this, unlike a personal loan when monthly repayments are pre-set, a 0% balance credit card requires consumers to be disciplined with their repayments to ensure that the balance is repaid in full before the interest-free period ends.

Usually, lenders will offer their most competitive personal loan rates and their best 0% balance transfer card deals to consumers with high credit scores. As such, consumers looking to take out a personal loan or apply for a 0% balance transfer card may want to check their credit score first – which can be checked for free online here.