The lure of credit cards with attractive interest rates and offers is sometimes irresistible. We turn to our credit cards whether it is an emergency expense or even for a frivolous shopping spree. It seems like an easy source of money to be paid at a later date. This way of managing credit card usage often leads to credit utilisation rising to great proportions. Sometimes it is to a point that we find it difficult to repay the credit card outstanding. A natural tendency to treat this is then to seek a personal loan to pay off the credit card debt.
Understanding Credit Card Debt
Credit card looks like easy money but has many hidden caveats. Piling credit card debt not only affects your financial position but also your credit score. In fact, outstanding credit can lower your credit score even if you are paying your credit card bills on time. This is because the credit rating depends not only on payment history, but also on various other factors, one being the limit utilisation. It is therefore important to know your revolving utilisation ratio to use credit card to your advantage rather than be a slave to its disadvantages. Revolving utilisation ratio is nothing but debt-to-limit ratio i.e. the amount of credit you utilise against the credit limit you are entitled to. The fact that credit cards are amongst the most expensive funds available in the market today, makes it even riskier. It is important to get out of the unhealthy cycle of credit card overdue.
Paying Off Credit Card Debt Using Personal Loans
Some of the ways to pay off credit card debt are to convert it into monthly instalments, debt consolidation through balance transfers, and through personal loans. Here we focus on the personal loan aspect.
People often wonder whether they should get a personal loan to pay off credit cards with bad credit. Here is how it works. You avail a personal loan and consolidate all your credit card dues under a single EMI. The interest rate for personal loan ranges from 10% to around 20% depending on the bank and your financial position. This is a better interest rate compared to that of credit cards which starts from 2.5% per month. You can also choose the tenure for the personal loan. A short tenure will help you pay off the loan quickly and with lesser interest payments. A long tenure, say 60 months will ease off your immediate burden, but you will end up paying higher amounts in interest.
What is The Advantage?
- Consolidation of various credit card outstanding under a single EMI is easier to track.
- Personal loans have a lower rate of interest than a credit card, making it a better option to repay.
What is The Disadvantage?
- Defaulting on a personal loan will generally hit your credit score more badly than simply paying off the minimum dues on your credit card. Hence you need to be financially confident of paying off the personal loan EMI every month.
- A longer tenure EMI may seem like a good option to reduce the immediate financial burden. But you end up paying significantly more by way of high interest payments.
- Personal loans are unsecured loans and hence carry a higher rate of interest than secured loans like loan against property, loan against gold etc.
Getting a personal loan to pay off debt, especially a personal loan to pay off credit cards, is not a bad idea. However, it is important to analyse your financial situation and commitments to not default on your personal loan EMI, and also to avoid paying excessive interest.