Often the best advice about paying down debts is to pay the smallest balance off first. But, paying one card off at a time might take a few years if you only pay the minimum balance due. And, depending on how much credit card debt you have, you’re still paying high interest each month. An alternative is taking out a personal loan at a lower interest rate. By consolidating all your debts into one loan, you can pay your debts off right away and then pay off the personal loan (and it’s much faster).
Here are a few ways you can use your personal loan to help consolidate your credit card debts and become debt-free in less time.
Pay Off the Card with the Smallest Balance First
Why this method works? Paying off the credit card that has the smallest balance means you’ll have extra money to apply to your other credit card bills. This is the snowball effect. Here’s how it works.
You have a card that you owe $5,000 on. You pay $150 per month. If you pay the card off in its entirety, that frees up $150 that you can apply to your other credit card balances and debts.
Pay Off the Card with the Highest Interest Rate
Why this method works? This is the avalanche method; paying off the card with the highest interest rate first. And this varies depending on the cards you have and your APR. Here’s how it works.
A bank might charge 19.99 percent as the annual percentage rate or APR. But, some banks use a varying interest rate. And, if you’re not careful when you sign up for the card, the rate might vary from 19.99 percent – 26 percent.
Most people don’t pay attention to their interest rate unless they carefully read their credit card statements each month. The APR is stated in account terms and conditions but some people don’t read the fine print.
If you find that you have one or more cards at 24 or 26 percent, you might want to pay these cards off first. By doing so, you’ll have less interest to worry about.
Pay Off All Your Cards at Once and then Pay the Loan Back
Why this method works? If all your credit cards have interest rates that vary from 19.99 percent to 24 percent or even 26 percent, taking out a loan might be in your best interest. When you take out a personal loan, your interest rate might range from 10 percent to 28 percent depending on your credit score.
When you pay your credit card debts off with a low-interest loan:
You’ll have a longer term to pay the money back.
There’s less stress than with several credit card bills.
The interest rate will be lower (based on creditworthiness).
Your credit score will improve when you pay off all your cards.
You’ll be eligible for more credit.
Tip: When you set up your personal loan, make extra or higher payments each month. You’ll pay less in interest and reduce your debt even faster!
Having credit card debt can be overwhelming if you’re stuck with a high interest rate. To help pay down debts faster, try the snowball or avalanche methods. And, you can always take out a personal loan at a lower APR to pay your credit cards off. You’ll have more spending power with banks and you won’t have that high APR to worry about.
With RateSupermarket.ca, you can get the money you need to pay off debts with high interest rates. Compare rates from Canada’s best financial lenders and apply for a personal loan today!