Which Loan Is Best To Pay Off Credit Cards?

When considering a loan to pay off your credit cards, choose the option that allows you to use lower-interest borrowing to pay off your highest-interest debt.

Paying Off Cards with Credit Cards

Getting another credit card is the easiest option, but it is seldom the best option. If you can't qualify for more traditional loans, watch for low- or no-interest credit card offers that allow you to transfer a balance. Credit card interest rates typically are 18 percent to 20 percent or higher; sometimes they are much higher. Transferring a balance with such rates to a low-interest card allows you to pay off your credit card debt with an interest savings.

The downside of using another credit card is that low rates typically are introductory only and rise to market rates after a given time. That means you easily can be on the hunt for another card to pay off that card. In every case, be certain the new card allows balance transfers and know the fees charged for transferring.

Putting Your Home to Work

Your home can help you to secure a low-interest loan to pay off credit cards. If there is equity in your home (i.e. if the value of your home exceeds what you owe on it), you can borrow from a bank with the equity as collateral. If you have a solid payment history on your mortgage, home equity loans typically have low interest rates.

However, be aware that using a home equity loan to pay off credit card debt is like using a shotgun to hunt flies. Home equity loans typically are large amounts for home renovations. The paperwork is extensive, and other lending options are less complex.

Personal Loans

Banks and credit unions will also make you a personal loan to pay off credit cards. If you have a relationship with a lender as a result of your auto or home loan, it is easier to qualify for personal loans. However, collateral requirements for personal loans typically are higher and interest will be at market rates. Despite that, these loans will almost always have lower interest rates than credit cards.

Debt Consolidation Loans

Typically, a debt consolidation loan will be the best option for reducing credit card debt. A significant arm of the lending industry focuses on debt consolidation so you will be dealing with experienced lenders who can quickly analyze your situation and develop a plan. Debt consolidation means rolling several high-interest loans into one larger loan, perhaps with a longer pay-off period. The consolidated loan typically has a lower interest rate. Those factors should combine to give you a lower monthly payment than the combined total of the payments on the loans you consolidated.

The “Can’t Lose” Loan

There is one loan that requires no collateral and no lender. You can’t default on it and can’t lose with it. Reducing spending and applying the money saved to your credit card debt will let you pay off your credit cards without incurring additional debts. 

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