Home > Managing Debt > 5 Times a Loan Beats a Credit Card

Comments 0 Comments

Credit cards are one of the easiest ways to borrow money. Simply pull out the plastic, and charge whatever you need. But easy isn’t always best.

In fact, there are times when a personal loan trumps a credit card. Here are five of them:

1. You Need a Debt-Free Date

A friend recently complained that he had been trying to pay off his credit cards for three years but had barely made a dent in the amount he owed. He told me he always tried to pay more than the minimum payment, but the balances just didn’t seem to budge.

If you’re someone for whom paying the minimum payment is a constant temptation, a personal loan could be a godsend. You’ll know exactly how much you need to pay — and for how long — to get out of debt. That’s because these loans typically require a fixed monthly payment for a specific number of years, usually between one and five.

On the other hand, there will be less flexibility with a personal loan because you can’t just make a tiny minimum payment. If you run into a situation where money is tight, you could risk falling behind on your loan. And just one late payment can cause your credit scores to drop dramatically. So make sure you can afford the payment on the personal loan before you consolidate your debt.

2. You’re Hoping for Better Credit Scores

Credit card balances affect your credit scores differently than personal loan balances. In fact, using a personal loan to consolidate credit cards may actually help your credit scores. Why? Because with revolving debt like credit cards, credit scoring models will compare your balances to your available credit limits. If you are using a significant portion of your available credit on one or more of your credit cards, you will have a high “debt usage” ratio, which can lower your credit scores. (Wonder if your debt usage is hurting your credit scores? You can get a free credit report summary from Credit.com to find out.)

By contrast, most personal loans are categorized as “installment” debt, and those balances are treated differently. (This guide explains how debt affects your credit scores.) LendingClub says that 77% of borrowers who used their platform to get a loan for debt consolidation purposes saw their credit scores increase within three months, with an average increase of 21 points.

There’s no guarantee your credit scores will go up if you get a consolidation loan, but if high debt usage is hurting your credit scores, you may want to consider this option.

3. You Want to Simplify

Juggling multiple monthly payments can be stressful. Using a debt consolidation loan to pay off multiple credit cards makes it easier to ensure your payments are made on time each month. It’s a lot easier to keep track of one due date, than say, three or four. 

Want to make things even simpler? Set up automatic payments (autopay) for your new loan, and start counting down the months until you are debt-free.

4. You Need More Money

Credit card credit limits often start out at $5,000 to $10,000 or less, depending on your credit rating and other factors. What happens if you need more than that? You may want to look into a personal loan. Many lenders offer loans up to $25,000. That’s enough to handle most financial emergencies, or to allow you to consolidate several credit cards into one monthly payment.

5. You Want to Save Money

If you have high-rate credit card debt, you may be frustrated to learn — like my friend — that most of your monthly payment is going toward interest, not toward paying down the balance. Getting a loan with a lower interest rate helps tilt that math in your favor, and can save you a lot of money in the long run. Again, returning to LendingClub as an example, in a survey of its borrowers, it found that over 70% of respondents reported using a loan from its platform to pay off another loan or credit cards, and reported the interest rate “was an average of 7 percentage points lower than they were paying on their outstanding debt or credit cards.” 

An alternative option would be to transfer higher-rate balances to a credit card with a very low, or even 0%, interest rate. But keep in mind those offers usually last from 12 to 18 months, and most assess a balance transfer fee of up to 4%. The winner of our Best Balance Transfer Credit Cards in America ranking this year, Chase Slate, currently offers a 0% balance transfer for 15 months with no annual fee. (You can read a full review of Chase Slate here).

Note: It’s important to remember that interest rates, fees and terms for credit cards, loans and other financial products frequently change. As a result, rates, fees and terms for credit cards, loans and other financial products cited in these articles may have changed since the date of publication. Please be sure to verify current rates, fees and terms with credit card issuers, banks or other financial institutions directly.

More Money-Saving Reads:

Image: iStock

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team