Credit cards are convenient, especially for large purchases, planning travel, handling an emergency expense, or a host of other uses. The responsible use of credit cards over time is also an excellent way to build one’s credit history, helping to pave the way for qualifying for more substantial loans, such as a car loan or a mortgage, in the future.
However, it’s important to pay careful attention to credit cards balances, especially in times of shifting interest rates. Rising interest rates can result in larger minimum payments and account balances that grow more quickly.
One smart strategy might be to consolidate your higher interest credit card debt with a personal loan. Harjas Sidhu, PNC Bank’s Head of Personal and Student Lending, offers some pointers.
“It’s important to remember that interest rates are the cost of borrowing money. So, if you can trade higher interest rate credit card debt for a personal loan at a lower rate, then it’s far easier to reduce the principal of the loan, rather than just paying interest. Personal loans may provide more advantageous terms, too.”
While a personal loan can be a powerful financial tool, one used by many, it’s important to decide if it’s the right option for your unique financial situation.
What Is A Personal Loan?
First things first. A personal loan is typically a lump-sum loan. As opposed to the revolving credit of a credit card, personal loans are paid back on a predetermined timeline, usually in installments.
Of course, it may feel counterintuitive to take out one kind of loan to pay a different kind of loan. However, the nature of personal loans versus credit cards could make a positive impact on your financial picture.
“It’s really all about the math,” Sidhu continues. “As the Federal Reserve’s prime rate goes up, credit card rates go up along with it. As a result, chances are good that a personal loan charges far less interest that your current credit card. It’s just smart money management to pay less in interest over time.”
What Are The Advantages of Personal Loans?
If getting rid of credit card debt—and the higher interest payments that may go with it— sounds appealing to you, a personal loan may have several distinct advantages.
- Lower interest rates. As mentioned earlier, personal loans usually have lower interest rates than credit cards.
- One payment a month, not several. Are you consolidating debt from multiple credit cards? With a personal loan, keep track of just one monthly payment.
- Easier budgeting. A personal loan has fixed payment terms, so you know precisely how much to set aside every month.
- Quick loan processing. As long as you provide all the proper documentation in your application, the decision on a personal loan application, especially at PNC Bank, usually takes place within days.
- Set repayment period. A rapidly growing credit card balance is never any fun. Eliminating revolving credit card debt by using an installment loan will enable you to pay off that balance within a defined time frame.
What Are The Disadvantages of Personal Loans?
While a personal loan is often a great avenue to transform credit card debt into something more manageable, it’s also important to realize its potential downsides.
- Extra Fees. While PNC Bank does not, some lenders will charge an application fee and/or origination fee to process your loan.
- You may not qualify for better rates. Depending on your credit score and credit history, you may not qualify for a personal loan that has a lower interest rate than your current credit card debt.
- Prepayment Penalties. While PNC Bank does not charge a fee to those paying off a personal loan early, other lenders may.
- Additional debt. A personal loan is a debt that needs repaid. You could wind up in an even more difficult financial situation if you use a personal loan to pay off your credit cards and then continue to accumulate more credit card debt.
As a reminder, when assessing the potential advantages and disadvantages of a personal loan to pay off credit card debt, conduct research and be sure you understand the terms and conditions of the loan and the impact to your current financial situation as you make any decisions.
Also, be sure to compare your expected monthly personal loan payment versus your current monthly outlay in minimum credit card payments, particularly if your personal loan has a short repayment term. Finally, know that application or origination fees may vary depending on the lender and the quality of your credit, with fees that could be as high as 10% of the total loan amount.[1]
With all of this in mind, it’s important to view a personal loan as part of your overall strategy to reduce debt. That strategy should include taking a close look at spending patterns, establishing a monthly budget, and developing habits that create long-term financial health.
What Documentation is Needed for a Personal Loan?
The better prepared you are before applying for a loan, the more smoothly the process will go. Before you start the application process for a personal loan, make sure you have the following information ready:
- Your Social Security number;
- Current address. If you’ve lived at your current address for less than two years, some lenders such as PNC will ask you to also supply your previous address;
- At least one government-issued Photo ID;
- Your annual income; and
- Your creditor information, including existing outstanding loan amounts and current monthly payments.
Other things to think about…
While a personal loan can prove to be an excellent way to manage and hopefully pay off credit card debt, it’s important to view it as only one part of a larger effort to achieve financial stability. As Sidhu points out, Debt needs to be undertaken carefully. It should be seen as part of a larger strategy to grow wealth and achieve financial strength. Consolidating credit card debt, then, should be considered your first step on the road to a more secure future.
Another step is improving your credit score. A strong credit score is the foundation for financial success in life. It not only means a higher likelihood of being approved for future loans, but often means enjoying more advantageous rates and terms as well.
When it comes to building your credit, think carefully before cancelling a paid-off credit card. Your credit score reflects not just your credit history and how much you currently owe, but the longevity of your credit accounts and what percentage of your available credit you use. Canceling credit cards can increase your credit utilization ratio—the amount of credit you have available versus how much you actually use. As a result, consider keeping open those credit card accounts with the most longevity.
Are you ready to make your debt more manageable? If you think a personal loan is the right option to explore, learn more about PNC's Unsecured Personal Loan or visit a PNC branch for an in-person conversation. You owe it to yourself to enjoy more peace of mind.
