Those with high levels of credit card debt may want to start considering personal loans for debt consolidation. According to recently released data from the Federal Reserve, the spread between average interest rates on credit cards and personal loans is between six and seven points. With numbers like these, using a personal loan to consolidate debt could save you a decent amount of money while also helping to improve your credit score. Read on to find out more.
Is It Worth Consolidating Credit Card Debt?
Data from the Federal Reserve shows that in the first three months of 2020, borrowers with credit card debt were charged an average interest rate of 16.61%. Meanwhile, those who used a personalized loan to consolidate their debts were only paying interest at a rate of 9.63 percent, which is considerably lower.
With a difference of 6.98%, it is actually the largest differential between interest rates on credit cards and personal loans since the Fed started tracking this data in 1998.
With much lower loan rates, if you were to use a personal loan for debt consolidation, you would likely save on interest, which would both reduce the total amount you end up paying over time and help you out. to pay off your debts faster. . If you want to get a feel for the custom loan options available to you, you can visit Credible to compare rates and lenders.
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Remember that the exact interest rate you will be granted will depend on the specifics of your financial situation.
How Debt Consolidation With A Personal Loan Can Improve Your Credit Score
In addition to helping you pay off your debts, using a personal loan for debt consolidation can also help increase your credit score. It does this in the following ways:
It reduces the amount of debt you owe
First, as stated above, using a personal loan for debt consolidation can help reduce the total amount of debt you owe by reducing the amount you will pay in interest charges. As long as you don’t keep using your credit cards to create new debt, you will actually owe less money overall.
For example, if you had $ 5,000 in credit card debt, at a rate of 16.61%, you would pay $ 1,877 in interest if you paid off your debt over 48 months. At 9.63%, you would only pay $ 1,044 in interest over the same period.
You can use Credible’s personal loan calculator to determine your potential repayment amounts at various interest rates. And use their free online tools to compare rates to find the best deals available.
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It lowers your credit utilization rate
The other area that this will have an impact is your credit usage. About 30% of your credit score is based on what’s called your usage rate, or the amount of credit you’ve used out of the total amount of credit you have. When your existing debt is moved from your credit cards to the personal loan, it will free up your available credit and improve your utilization rate.
Find out what type of rate you qualify for with your current credit score.
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It improves your credit mix
The bottom 10 percent of your credit score is affected by what’s called your “credit mix,” or the different types of accounts that appear on a borrower’s credit report. By taking out a personal loan, you are effectively adding a new installment loan to your credit report and improving your credit mix.
EVERYTHING YOU NEED TO KNOW ABOUT A PERSONAL LOAN
Personal loan conditions to consider
As with any loan, if you’ve decided to consolidate your debt with a personal loan, it’s important to make sure you’re looking for the best rates. Visiting Credible will give you access to some of the best rates available.
However, when shopping you should make sure to compare the following terms to make sure you get the best deal:
- Term of the loan: The loan term tells you how long it will take to pay off the loan. Generally, you will want to choose a loan term that allows you to have an achievable monthly payment. While a longer loan term usually comes with a lower monthly payment, it usually also means paying more interest charges over time.
- Annual percentage rate (APR): The APR on a loan is a measure that includes both the interest rate and the fees. Often times, this will give you a more accurate picture of how much you will be paying over the life of the loan than looking at the interest rate alone.
- Collateral: Most personal loans are unsecured, but you may be able to get a better interest rate if you choose a loan secured by collateral.
- Monthly payment: Ultimately, you’ll want to go for a personal loan with a monthly payment that fits well into your current budget.