We get a lot of emails from people who are really in debt. A question we are asked over and over again is, “Should we get a personal loan to pay off our credit cards?” Every situation is different.
The reason people ask us this question is very simple. With a credit card, you pay 20% plus a year of interest on a bank loan and you pay 10% annual interest. The difference, while only 10% is huge in terms of dollars over a year and can mean the difference in paying off a debt amount in a much faster time. The answer seems simple enough, right? well, there are many shades of gray in the answer.
However, there are a few questions to ask yourself. It’s only when you can answer YES to every question that you should consider getting a Personal loan to pay off your credit card.
- Once the credit cards are paid, will I cancel them?
You don’t have to pay off your credit cards in full just to start with a zero balance and start racking up debt again. Just because you are paying off your credit card, the card company does not cancel them. You must request it. We have met people in the past who have done this and continued to use the card as if it were someone else’s money. Fast forward one year, and their credit cards are in the same debt position as when they applied for the loan. You should be able to cancel the credit card 100% once the balance is paid.
- Are you comfortable with your household budget?
Many people think that if they get a personal loan to pay off their credit card, it will be the answer to their budget problems. They take out a personal loan, cancel their credit card, take our advice and close their credit card. However, then tragedy strikes, his refrigerator breaks down. Due to the fact that they live paycheck to paycheck, they have no money saved. Before applying for a personal loan, test yourself. Go through some scenarios in your mind. What if you needed $ 1,000, $ 2,000, or $ 3,000 quickly? Could you cover it without having to reopen a new credit card?
- Do you have a debit card?
There are certain payments in this world where you need a credit card number. Let’s face it, over the phone and in Internet stores, sometimes credit cards are the only way to pay. With a debit card, you get all the benefits of a credit card, but you use your own money. There is therefore no possibility that interest will be charged. When closing your credit card, make sure you have set up a debit card. Make a list of all monthly direct debits. You can easily call these companies and ask them to transfer your monthly direct debits to your debit card. You don’t want to start receiving late fees because your credit card is closed when businesses try to make withdrawals.
- Can you make additional payments on your personal loan without being penalized?
While credit cards are a life-sucking product, they do have a great advantage. You can pay more than the minimum payment without being financially penalized.
As your budget improves over time, you should have more and more money to pay off the personal loan. You don’t want to be in a situation where you have the money to pay off the loan in full (or a substantial amount; however, there is absolutely no financial benefit to doing so.
- Is the credit card balance too high to be paid off in the next six months?
If you owe $ 20,000 on your credit card, have $ 700 in the bank, and live paycheck to paycheck, it will obviously take you over six months to pay off your total debt. However, if you only owe an amount, which you think you can repay in 6 months by carefully analyzing your budget, our advice is to forget about the personal loan.Business