If you’re living from paycheck to paycheck and you stress about how to pay your credit card debt, you are part of a silent majority. Not the political kind Nixon and Trump like to hypothesize about but a real financial silent majority.
Money — or more to the point: the lack thereof — is the leading cause of stress in the United States, according to a 2015 study published by the American Psychological Association. Yes. Money tops work, divorce, family responsibilities, and health as a stress trigger. It’s not hard to see why.
The average American household with a credit card balance owes more than $15,700 in credit card debt, and only 47% of Americans have enough savings to cover three months of expenses, according to a 2015 study by the Federal Reserve Bank. The same study reports that if hit by a $400 emergency expense, 69% Americans would either be unable to pay for the expense or would have to put it on their credit card.
How do Americans deal with all this stress? According to the APA study mentioned above, stress management techniques include binge watching TV (55%), overeating (38%), drinking alcohol (20%), and smoking (25%).
As fun as some of these stress management techniques may be, there are healthier strategies to managing credit card debt. One of them is to pay off your credit card debt with a loan. Although debt consolidation is no silver bullet, there are times when paying off your credit card with a personal loan makes sense.
When does it make sense to pay off credit card debt with a loan?
There are very few situations when taking on additional debt to pay off credit card debt makes sense. If you’re not careful, you can find yourself moving debt from one bank’s pile to another bank’s pile and have nothing but loan origination fees to show for it. For instance, if your credit score is in the dog house and you can’t afford the minimum payments on your credit card debt, it is unlikely you will find a loan with favorable terms. Instead, you may need to consider debt relief options, such as debt settlement, consumer credit counseling, or even bankruptcy.
However, there are three reasons you should definitely consider paying off credit card debt with a personal loan:
- To lower your interest rates
- To consolidate payments
- And to lower your monthly payments
Lower interest rates and prepayment penalties
This is a must. Avoid consolidating your credit card debt if the new loan doesn’t have lower interest rates. The key to making this work is to reinvest whatever you save in lower interest rates into prepaying the balance of your loan. Make sure your loan does not charge prepayment penalties and pay as much as you can off the loan’s principal every month.
Lower your monthly payments
Consolidating your credit card debt into a single loan payment can reduce your total monthly debt payments. Although lower monthly payments may help you stress less over money, they are a two-edged sword. We all like the sound of lower monthly payments but they often come with longer terms, which could mean higher total interest payments. Lower monthly payments can also trick you into spending more and increasing your overall debt.
If your monthly payments drop when you consolidate your credit card debt, be smart and invest your monthly savings into paying off the principal.
Consolidate your credit card bills into one payment
In 2015, Americans paid $11.5 billion in penalty fees. Late payment fees, which cost around $27 a pop, are the most common of the penalty fees charged by credit card companies. Sadly, consumers are often hit with late payment fees because they forget to pay a credit card not because they couldn’t afford to make the minimum payment. It’s not surprising many credit card holders forget to pay. The average American has 3 to 7 credit cards, according to a recent Gallup survey.
Reducing multiple payments into one monthly loan payment can simplify your budget and reduce the chance of penalty fees. Just make sure you don’t fall into the trap of maxing out your credit cards all over again.
How can you consolidate your credit card debt with a loan?
If your credit score is good to excellent, you have many lenders to choose from when it comes to consolidating credit card debt. Consumers with fair or bad credit will struggle, but there are still options available. If your credit is not great but you just graduated, there are lenders that specialize in recent college graduates.
Try out SuperMoney’s new personal loan search engine to see what are the best terms you can qualify for. SuperMoney’s loan search engine allows you to filter loans by credit score, state, loan amount, origination fees, and APR.
What if you don’t qualify for a debt consolidation loan?
If your credit card is shot or you simply don’t have the income to make minimum payments on your debt, paying off your credit card debt with a loan is not a good idea. You may need a more aggressive approach, such as consumer credit counseling, debt settlement, or bankruptcy.
Andrew is the managing editor for SuperMoney and a certified personal finance counselor. He loves to geek out on financial data and translate it into actionable insights everyone can understand. His work is often cited by major publications and institutions, such as Forbes, U.S. News, Fox Business, SFGate, Realtor, Deloitte, and Business Insider.