Key learning points
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When you use a personal loan to pay off your vacation credit cards, you get one payment with a fixed interest rate that’s easy to track.
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Replacing credit card debt with a personal loan can improve your credit score if you don’t open new cards and continue to use the open cards.
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You may be able to pay a much lower interest rate on a personal loan compared to credit cards.
If you’re getting a little carried away with your credit card spending during the holidays, a personal loan can help you get back on track in the new year. You receive all your money at once and can use it to combine multiple debts into one personal loan at a fixed interest rate and payment and a fixed repayment date.
When Should You Use a Personal Loan to Pay Off Credit Card Debt?
If you don’t have enough savings to pay off the high-interest credit cards you used during the holidays, a personal loan may be worth looking into. Personal loan rates are on average lower than credit cards, and some lenders even offer repayment terms as short as four months.
The approval process is quite simple and typically only requires you to provide your income, credit scores, and current address. Typically, you can receive the money within a few days of approval, allowing you to get rid of your vacation credit card debt quickly.
Most personal loans are unsecured, meaning you don’t need a car, house or other asset for approval. It also means that you won’t have to deal with having your car repossessed or evicted if you can’t repay the loan.
A few disadvantages include potentially high fees and penalties if you pay off the loan early. The longest repayment period is typically seven years, which may make the monthly payment more affordable. The longer the term you choose, the more interest you pay.
Pros and cons of using a personal loan for debt consolidation
Positives
- Lower rates than credit cards.
- Fast approval and financing.
- No collateral required.
- Fixed monthly payment.
Cons
- Monthly payments may be higher than credit cards.
- Penalties may apply if the balance is paid early.
- Origination costs may be higher than other types of loans.
How to Pay Off Credit Card Debt with a Personal Loan
The process for paying off credit card balances with a personal loan is quite simple. First add up your vacation credit card balance so you know how much to apply.
Then review your budget to determine how much monthly payment you can afford. A personal loan comes with a fixed monthly payment, so make sure you’re happy with the payment before finalizing your options with a lender. Before applying anywhere, use a loan calculator to review payment options at different rates and terms.
Finally, start shopping around for the best personal loan rates and terms. Personal loans can usually be found at your local credit union, bank or online. Request at least three quotes and compare rates, costs and any unique features to determine which one suits you best.
Insight into bank rates
If using a credit card for the holidays has become an annual tradition, consider starting a new tradition by setting up a holiday savings account in the new year so you have cash for the holidays next year’s editions.
Which credit card should I pay off first?
One of the benefits of taking out a personal loan to pay off credit card debt is the flexibility to pay off the balances on your own schedule. While it’s always best to pay them all off in full, you may want to consider these options if for some reason you can’t get approved for a personal loan amount high enough to pay off all of your cards.
Pay the highest interest balances first
This is similar to the debt avalanche method of paying off credit cards, except you use a lower-interest personal loan instead of cash to reduce high-interest credit card balances. With this strategy, you pay off your most expensive debts and replace them with a personal loan with a lower interest rate and a fixed payment.
Next, check the expiration dates on deferred interest cards
If you took advantage of the ‘no interest for x months’ or ‘no interest if paid in full’ promotion, check the fine print to keep track of your due date. If you’re concerned about deferred interest due to forgetting or not being able to pay the balance in full before the promotion’s due date, consider using your personal loan balance to pay the bill in full early.
Remember to buy now and pay loans later
A recent Bankrate survey found that 10 percent of holiday shoppers planned to use buy now, pay later (BNPL) loans this season. If you’re worried about missing payments – and facing the high interest rates that follow – pay off the BNPL loans with your personal loan.
When should I pay off my credit card?
It’s always best to pay off credit cards as quickly as possible to avoid paying so much interest. Consider purchasing buy now, pay later or deferred interest cards well before promotional periods end to avoid retroactively paying expensive interest charges if you miss the promotion expiration date.
What’s the Best Way to Pay Off Credit Card Debt During the Holidays?
The best cure for a holiday debt hangover is to pay it all off in cash. If your savings haven’t kept up with your expenses, or you don’t qualify for a personal loan, here are some other options that may provide you with some debt relief.
- Use Christmas gifts. Add up the money you received in holiday gift cards and use that toward your credit card balance.
- Redeem credit card reward points. If your rewards credit cards offer a cash option, consider redeeming points and using the money to pay off some of your credit card debt.
- View balance transfer credit cards. See if you qualify for the 0% APR balance transfer cards promotion. Beware of transfer fees; these can amount to up to 5 percent of the amount you transfer.
How to Pay Off Your Credit Card Debt Fast After the Holidays
Pay off the balances as soon as you receive your statements. The faster you pay off your credit card debt, the less interest you pay. If you earn extra money from part-time jobs, get holiday bonuses or a raise, you can use the money to make extra payments on any remaining holiday debt. With a little extra budgeting discipline, you can reduce your credit card balances to zero.
