Credit card debt personal loans – Get rid of your plastic debt
Credit cards may be the epitome of convenience, but they’re also notorious for having high interest rates. Left unchecked, your plastic debt can quickly snowball and bury you under. Learn how credit card debt personal loans can nip your interest costs in the bud and help you save a pretty penny or two.
What’s a credit card debt personal loan?
A credit card debt personal loan is money you borrow specifically to clear your plastic debt. Typically, most credit consolidation loans are unsecured, allowing you to borrow as much as $50,000 over up to 5 years. However, you can always use a secured personal loan for the same purpose if you want to borrow more for longer and at a lower rate.
You can also choose between a fixed rate and a variable rate. Generally, if you’re planning to consolidate your credit card debt, the process should work out to something like this:
- You take out a suitable personal loan with a lower rate than your combined credit card debt.
- You then use that one loan to pay off your multiple credit cards.
- In other words, you use a low-interest personal loan to pay off several high-interest credit cards.
- Once you’re clear of your plastic debt, you only have to deal with a single personal loan with a reduced rate and, therefore, lower repayments.
Why should you consolidate your credit card debt?
The main attraction of using a personal loan to consolidate credit card debt is how it trims your borrowing costs. Here’s why it may leave you smiling all the way to the bank:
- Reduces your interest rate. Generally, personal loans have lower rates than credit cards. So swapping out your credit card debt for a personal loan means you pay less interest over the life of the loan.
- Comes with a fixed term. While a credit card is an ongoing line of credit, a personal loan comes with a fixed repayment period. That means you can’t keep borrowing unless you apply again. This removes the temptation of always having credit on hand and the likelihood of continuing the debt cycle. Instead, you become focused on repaying your debt within the specified period. You can even make extra repayments, so you can exit your contract early and save more on interest.
- Removes the hassle of making multiple repayments. Keep in mind that multiple repayments are not only a hassle – they also come with associated fees. Eliminating these fees means you save a few more dollars, and it all adds up in the long run.
Here’s how credit card debt consolidation might work in real life
Let’s take a hypothetical example that shows if a personal loan is better than credit card debt. Let’s say you have 3 credit cards where the minimum repayment is 2% or 20%, whichever is higher. Using a credit card interest calculator, the figures would look something like this:
| Total Balance =$12,000 |
Credit card 1 |
Credit card 2 |
Credit card 3 |
| Balance on each card |
$3,000 |
$4,000 |
$3,000 |
| Interest rate |
17% |
16% |
12% |
| Minimum repayment – 1st month |
$61 |
$82 |
$61 |
| Estimated total repayment time |
22yrs 3 months |
23yrs 7 months |
14yrs 9 months |
| Estimated total interest |
$5,383 |
$6,427 |
$2,354 |
Keep in mind the following assumptions are made: There’s no additional spending, and credit card fees are omitted. Using this scenario, the total interest paid for all 3 credit cards then boils down to $14,164. Now let’s take a look at how this changes with a credit card debt personal loan:
| Loan amount |
$12,000 |
| Loan term |
5 years |
| Interest rate |
8% |
| Estimated monthly repayment |
$376 |
| Estimated total interest |
$1,537 |
So, by consolidating your combined credit card debt of $12,000 into a single unsecured personal loan of the same amount, you save yourself a ton of money while paying off your debt significantly sooner. Be mindful that monthly loan repayments on a personal loan may be higher than your minimum credit card repayments, more so when fees and charges are added.
You can always choose a longer term to get lower repayments, but it will cost you in the long run. Use our credit card debt consolidation loan calculator when making comparisons to ensure you’ll be able to afford the repayments.
How to compare credit card debt consolidation loan options
It helps to consider the following when choosing the best personal loans for credit card debt:
- Interest rate. Since interest represents a big chunk of your borrowing costs, credit consolidation only makes sense if you get a competitive rate. Most rates are risk-based, so try and improve your credit score before applying to ensure the numbers are right for your purposes.
- Fees and charges. Personal loan fees generally include upfront establishment and application fees plus ongoing monthly and annual fees. Also, watch out for early payout fees, redraw fees, and late payment fees. We recommend checking the comparison rate, which represents the true cost of borrowing (interest + standard fees).
- Borrowing limits and loan terms. Find out which lender allows you to borrow enough to cover your plastic debt and repay it over a budget-friendly period.
- Repayment flexibility. This generally refers to whether you can choose a repayment frequency that suits your income cycle – weekly, fortnightly, and monthly options are usually available. Does the lender allow you to make extra repayments, and is there a cost? Is there a redraw facility to access your extra repayments when you need them? Consider these features when assessing how flexible a particular product is.
- Eligibility. Generally, lenders require borrowers to be 18 years old or above and either an Australian citizen or permanent resident. Things like having a good credit score and a regular, sufficient income also increase your chances of approval.
When consolidating credit, are there any alternatives to personal loans?
Yes, a balance transfer credit card is one main alternative. This is often the best option because of the 0% introductory period. But you must repay the full credit card balance within the specified period. Otherwise, a much higher rate will kick in, leaving you at square one or in a worse debt situation.
And considering that home loans tend to have even lower rates than personal loans, you can also refinance your home loan to consolidate your credit card debt. However, this means you take longer to repay the debt, and your interest costs will therefore increase.
If you have additional existing debt such as personal loans and other credit accounts, you may want to consider a debt consolidation loan.
Credit card debt personal loans FAQ
How do I apply for a credit card debt consolidation loan online?
Once you finish comparing offers in the product table above, click “Go to Site” for your favourite pick and start applying on the lender’s website.
Can I consolidate my credit card debt if I have bad credit?
Yes, but you may have to settle for a higher rate or opt for secured credit.
What else should I consider when consolidating credit?
Debt consolidation is not a magic solution. When consolidating your debts, make sure you know how all the numbers will work out going in. Read the fine print so you understand the terms and conditions and, if possible, seek professional advice.
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