Should you use Personal Loan to Pay off your Credit Card Dues?

We generally use credit cards more often to buy something or to pay various bills. The reason behind using credit card to make payments is that we can buy an item now and get some time (say 45 days) to actually make the payment. Sometimes some people use their credit cards to make a lot of unnecessary spending and later realise that they do not have funds to make credit card bill payment when it is due. In such a situation is it good to use Personal Loan to pay off your credit card dues?

Personal loan is a loan you can avail to use for a variety of purposes. In India, banks offer personal loan at an interest rate ranging between 10% to 30% depending upon credit score and repayment capacity of the customer while credit cards charge 2% to 4.5% per month interest rates if the bill is not paid on time.

For those persons who lack credit discipline, a credit card can create problems as it has an open line of credit which allows them keep using credit card until its full limit is not extinguished. When the outstanding balance on your credit card becomes very high due to usage of credit cards for some urgent emergencies, making credit card bill payments becomes very difficult. At that time, the option of using personal loan to settle down your high-cost credit card bill appears to be the best thing to do.

While analysing of making payment of credit card dues through availing personal loan or not, we need to consider various important points as outlined below:

(1) Interest rate on Personal Loan

We must check out the rate of interest on personal loan. If it is significantly lower than that of credit card interest rate. it is advised to avail personal loan and pay off the credit card dues before due date. If you have a good credit score, Interest rate on personal loan will be low and paying off credit card bill using personal loan amount will work for your benefit.

(2) Amount of Credit Card Dues

If the amount of credit card dues is large enough to avail personal loan to pay it off, it makes sense to go for a personal loan to pay off large credit card bills. If the credit card bill amount is small then it is not worthy to opt for persoanl loan to clear it off.

(3) Fees associated with Peronal Loan

It is also important to consider various fees associated with Peronal Loan such as processing fee, foreclosure charges, administrative charges, etc. apart from interest rate on the personal loan. If the sum of all such chrges along with the interest rate charged on personal loan exceeds the interest charged on credit card dues, it is not worthy to pay off credit card bills availing personal loan.

(4) Check out your Future Cash Flow Status

If you settle your credit card Dues using personal loan, you are, in a way, delaying your credit dues and agreeing to pay them in several months i.e. during persoanl loan tenure, which will certainly have an impact on your future cash flow. You must also consider this point before making any decision.

(5) Impact on Credit Score

If you make delay in paying high credit card bills, it will have a negative impact on your credit score. If you find that the credit card bill is very high and you really do not afford to pay it off with the fund available with you right now, you can avail personal loan and pay it off so that your credit score would not get hampered.

Bottomline

Availing a personal loan to clear off credit card dues seems to be relatively affordable but at the same time you should remember that you are accruing extra debt, if you take out a personal loan to pay off your credit card dues. However, by paying credit card bills through personal loan you will get more time to pay off your obligations. Though personal loans have lower interest rates than credit cards, you may not be approved for a personal loan, in case your credit rating is very low.

Share This : Anupama is a Co-Founder of CodeForBanks.com. She is an MBA (Finance) and Chartered Financial Analyst (CFA). She also carries a Fellowship degree in Life Insurance Sector and is a Master of Computer Application (MCA). She is an expert in Finance Field with an experience of over 18 years on different managerial positions in finance industry including Stock Market, Depository and Mutual Fund Sectors. Apart from that she has remained for few years in the field of marketing as well. Her suggestions and advice for investments have been very useful to many people.
Her vast interest & expertise in the field of finance have encouraged her to write the articles so that others can also get benefitted out of them. She never loses any opportunity to learn and be creative. She is a valuable asset for CodeForBanks.com & important resource to all those around her.