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7 Reasons to Get a Credit Card Consolidation Loan

Last updated May 9, 2024

Applying for more credit to reduce your current debt load might sound counterintuitive – how can taking on more debt help me get out of debt? But, if you’re deep in high-interest revolving debt, finding a smarter credit option like a personal loan could be the first step towards financial freedom.

The best debt consolidation solution simplifies your financial life or lowers your cost of debt – or even better, does both. Here are 7 reasons you might want to consider a debt consolidation loan.

1. Make More Progress Paying Down Debt

Making on-time credit card payments each month is important, but if you’re only making the minimum monthly payment you could be stuck paying off your balance for years. Your minimum payment is typically applied to the interest you owe, with only a small portion actually applied to your principal balance. That means you’re making very little progress on paying off your balance and spending a significant amount on interest charges on the outstanding balance you’re carrying month to month.

Take a look at your billing statement and look for the “Card Act” disclosure. It states how long it would take to pay off your current balance—and how much you’ll pay—if you only make minimum payments. When you consolidate your credit card debt into a fixed rate personal loan, you’ll be making more than the minimum monthly payment and making big strides toward paying down that balance!

2. Know When Your Loan Will be Paid Off

Do you want to circle the date on the calendar for when you can be debt free? If yes, then flipping your debt from a variable rate, revolving product like a credit card to a fixed rate installment product like a personal loan can help you see the light at the end of the tunnel. An installment loan allows you to secure a fixed number of payments on a set schedule so you know exactly when your loan will be paid off.

3. Save With a Lower Fixed Interest Rate

Finding a personal loan with a lower interest rate than your credit cards can help you save in the long run. The good news is that checking your rate with online lenders only takes minutes and won’t impact your credit score because most online lenders only do a soft inquiry to give you a pre-approved offer.

If you find that your personal loan offer has the same rate as your credit cards, do the math first before you decide that the personal loan isn’t right for you. When you move your debt from a variable rate to a fixed rate, you get on a payment schedule where you can potentially pay it off sooner, which could mean more savings in the long run.

4. Secure Predictable Monthly Payments

Another reason people like consolidating their credit card debt with a personal loan with fixed rates and terms is because it gives them predictable monthly payments. With variable rate products, the interest rate can move up or down whenever the underlying index changes, which means your interest rate may reset on a monthly, quarterly or annual basis. When interest rates reset, so does your monthly loan payment or the amount you owe on your credit card balance. This can make it extremely difficult to develop a monthly budget that you can follow consistently.

5. Streamline Your Finances with One Payment

I think we’d all agree, paying one bill is better than paying two or three, right? Debt consolidation means taking out one new loan large enough to repay some or all of your outstanding debt. That means one of the biggest benefits is that you can say good-bye to managing multiple accounts.

Not only does having a single monthly payment simplify your finances, it can make it easier to stick to a budget and avoid late payments – all good things!

6. Diversify Your Credit Mix

Your credit mix is one of the key factors that impacts your credit score, so having a diversified mix of credit – revolving and installment debt – can help you boost your score. Lenders and credit bureaus not only want to see that you can handle credit responsibly, but also that you can manage different types of credit. If you only had credit cards before, adding an installment loan can help improve your credit mix, and in turn, possibly boost your credit score over time.

  • Revolving Accounts: they have different payments each month because you are charging different amounts every month. If you don’t pay in full each month, you’ll accrue interest. Credit cards are the main example of revolving credit.
  • Installment Accounts: they have fixed payments each month over a set time period. You don’t have to pay the account in full each month, but you must pay the required payment amount. The interest rate charges are typically built-in at the start of the loan and are usually amortized evenly over the life of the loan. Examples include mortgage loans, auto loans and student loans, among others.

7. Improve Your Credit Utilization Ratio

If you’re close to your limit on your credit cards or they are already maxed out, your credit utilization is probably quite high. Using an installment loan to pay off your credit card balances can boost your credit scores considerably within a matter of months because it improves your credit utilization ratio.

Lowering your credit utilization rate can lead to a meaningful credit score increase relatively soon. In order to get this score bump, it’s vital that you do two things: keep up with the installment loan payments and —just as important—avoid letting your credit card utilization rate climb back up to 30% or more again. That means keeping your credit card balances low once you’ve paid them off.

Reasons You Shouldn’t Get a Debt Consolidation Loan

Using a personal loan to consolidate credit card debt is a great option for many of us, but it’s not for everyone. Here are a few questions to ask yourself:

  • Can I resist the temptation to spend again? Paying off credit card balances with a personal loan is great, but only if you can resist the urge to swipe again. If you can’t, you might end up in even more debt that you started with.
  • Can I afford this loan? If you end up overextended and unable to pay, late payments can damage credit – check your monthly budget and make sure you can afford your new monthly payment.
  • Do I understand the terms? Check the rates, fees, and terms of your loan offer and be sure you understand the APR

Final Thought

A personal loan can be the gamechanger that helps you take control of your debt and simplify your finances with predictable monthly payments and a lower fixed rate that translates into more savings. Plus, it can help you improve your credit utilization and diversify your credit mix, ultimately helping you boost your score so you have better credit opportunities in the long run.

But, don’t forget -- the key to staying on track with your debt consolidation loan is to avoid taking on new debt. If you borrow money to pay off your credit cards and then charge them back up again, you’re in worse shape than before!

Check your rate to see if you qualify for a personal loan today!

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