How Can Personal Loans Save You Money and Even Build Your Credit Score?
Last updated 10/04/2024 by
Andrew LathamSummary:
Looking for a way to get out of debt faster and improve your credit score? A personal loan could help. By consolidating high-interest credit card debt, you can save on interest, simplify your payments, and even boost your credit score. Find out how a personal loan works, how much you could save, and why it might be a smarter choice for managing your debt.
If you’re struggling to keep up with high-interest credit card debt, you’re not alone. Many people are looking for better ways to manage their finances, and personal loans could be the solution. By consolidating your debt, you can save money, reduce financial stress, and even improve your credit score. Let’s break down how it works.
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How personal loans can help you save money and pay off debt faster
Credit card debt can be expensive. The average U.S. household in 2024 carries about $8,674 in credit card debt, with an interest rate hovering around 21.5%. If you’re only making the minimum payments of $175 per month, you could be paying more than $12,900 in interest over the next 10 years—just to service that debt. That’s a huge financial burden!
However, by consolidating your credit card debt into a personal loan with a lower interest rate, you can get debt-free much sooner. Let’s say you qualify for a personal loan with a 13% APR over three years. You’d save over $8,500 in interest compared to sticking with credit card payments. Plus, you’ll know exactly when you’ll be debt-free, which can offer peace of mind.
Boost your credit score with debt consolidation
Your credit score is crucial for financial stability, and a personal loan could help improve it. Here’s why: credit utilization, or the amount of available credit you’re using, makes up 30% of your FICO score. When you consolidate your credit card debt into a personal loan, your credit utilization ratio goes down because you’re reducing the balances on your cards. This simple step could give your credit score the boost it needs, especially if you’ve been struggling with high balances for a while.
Additionally, showing that you can handle different types of credit (like loans instead of just revolving credit like credit cards) can positively impact your credit profile.
Simplify your finances with one easy payment
Managing multiple credit cards, all with different interest rates and due dates, can get overwhelming. A personal loan simplifies this by consolidating your debt into one monthly payment. Even better, you can often automate this payment, so there’s no risk of missing a due date and getting hit with late fees. With one fixed payment to keep track of, your financial life gets a lot easier.
Check your rates without affecting your credit score
One of the best parts of using a personal loan to consolidate your debt? You can check your rates without impacting your credit score. SuperMoney offers a personal loan comparison tool that lets you see rates from multiple lenders in minutes. It’s quick, free, and doesn’t require a hard credit inquiry, so you can explore your options without any risk to your credit score.
Ready to get started? Check your rates now and see how much you could save today.
Frequently asked questions
How does consolidating debt with a personal loan work?
When you take out a personal loan for debt consolidation, the loan pays off your existing credit card balances. You then make one monthly payment on the loan, usually at a lower interest rate, which can save you money and simplify your finances.
Will consolidating debt with a personal loan hurt my credit score?
Consolidating debt can actually improve your credit score by lowering your credit utilization ratio and making it easier to manage your payments. While opening a new loan might temporarily lower your score due to a credit inquiry, the long-term benefits can outweigh this.
What credit score do I need to qualify for a personal loan?
Lenders typically look for credit scores of 600 or higher to approve personal loans. However, the best rates are generally available to borrowers with scores in the mid-700s or above.
Are there fees associated with personal loans?
Some lenders may charge origination fees, which are usually 1% to 5% of the loan amount. It’s important to check for fees when comparing loan offers.
Key takeaways
- Personal loans can help you consolidate high-interest credit card debt.
- You could save thousands in interest and pay off your debt faster.
- Consolidating your debt may improve your credit score by lowering credit utilization.
- One monthly payment can simplify your finances and reduce stress.
- Check your loan rates without affecting your credit score using SuperMoney’s tool.
Andrew is the Content Director for SuperMoney, a Certified Financial Planner®, 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.
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