Credit cards can do a lot of things for you – for example, they can shop you online, they can build up your credit score, and fund your emergency needs provided used properly. Some people generally have a question if they can use a credit card to pay off a personal loan.
To get the answer to this question, you need to know how a credit card works. A credit card seems like a tool that lets you buy anything with a single swipe, but you do not realize that you are taking out a new loan every time you use your credit card.
It keeps adding money to your balance until you pay off the bill. After the settlement of your credit card bills, you are again free to use up that money. Every credit card has certain terms and conditions. Some credit cards allow you to have a grace period of 30 days, which means no interest will accrue.
However, not all credit card companies provide a grace period. In this situation, interest starts accruing as soon as you make a purchase. If you keep paying off the debt within the grace period, your credit score will not decrease.
Now the question is if you should use a credit card to pay off a personal loan
You may assume that it will be the best alternative to settle your personal loan. In some cases, it can be. Financial experts suggest that you can use a credit card balance to pay off your personal loan, provided you are saving money.
You can directly use your credit card balance to pay off your personal loan. It is just like a balance transfer. However, you can use this facility only when your credit card issuer allows you to do it.
Otherwise, you will have to ask your credit card provider for a cheque that you will write to your personal loan lender. Although these things seem simple, they are not. There are various downsides that you need to evaluate to ensure that whether you are saving money or not.
Using your credit card balance to pay off your personal loan can help you pay off the whole of your personal loan, but the other side of the coin says you still owe a debt. It is just like the form has changed, but you are still there where you were.
If you use your credit card to pay off your personal loan, you do not have to pay off the balance. Do not forget about the balance transfer fee. Your credit card issuer will charge a 1% to 5% fee for a balance transfer, depending on their policy.
Further, you will have to pay off that balance within the interest-free period. Otherwise, it will charge very high interest rates. Financial experts recommend that a credit card be a good option to pay off your personal loan only when they carry higher interest than credit cards.
Even though you are to pay a balance transfer fee, you can still save money using your credit card to pay off small loans with a high interest rate like no credit check loans.
Do not forget to count your bad credit score
Personal loans are usually expensive. This is because they are unsecured. Even though you have a good credit rating, there is always a risk of default, and lenders charge a high-interest rate. Interest rates are slightly higher when you take out bad credit personal loans.
Before you decide to pay off these loans with your credit card, you should calculate the cost. Although credit cards also charge high interest rates, they may better settle bad credit personal loans.
This is because they can be very expensive. However, make sure that you can pay off the balance within the grace period. Otherwise, it will cost you more than that.
Have a payment plan
You should have a payment plan before you jump to this decision. You can do various things, but it does not mean that you should do them. It means even though you have a credit card to pay off your personal loan, it does not mean you should use this alternative.
You should treat this option as a last resort. You can use various other alternatives. Financial experts suggest that you should make a repayment plan.
· Talk to your lender and tell them why you are unable to pay off your personal loan and ask them to put you on another repayment plan. This will make it easier for you to pay off the debt without racking up outstanding balances.
· If you have already made multiple defaults and accrued interest, you should consider talking to a debt management company. They can talk to the lender and negotiate with them so you can easily pay off your debt with affordable interest rates.
The bottom line
A credit card can be considered a good way to pay off your personal loan but only when it is helping you save some money. Experts suggest that you should compare the cost of credit card balance payment and personal loan settlement. If the former costs you more than the latter, you should avoid it.
If you do not know the right way to tackle your debt, take the help of a financial counselor. They will help you come up with a repayment plan that may work for you.