5 Times a Loan Beats a Credit Card

Credit cards are one of the easiest ways to borrow money. Simply pull out the plastic, and charge whatever you need. But easy isn’t always best.

In fact, there are times when a personal loan trumps a credit card. Here are five of them:

1. You Need a Debt-Free Date

A friend recently complained that he had been trying to pay off his credit cards for three years but had barely made a dent in the amount he owed. He told me he always tried to pay more than the minimum payment, but the balances just didn’t seem to budge.

If you’re someone for whom paying the minimum payment is a constant temptation, a personal loan could be a godsend. You’ll know exactly how much you need to pay — and for how long — to get out of debt. That’s because these loans typically require a fixed monthly payment for a specific number of years, usually between one and five.

On the other hand, there will be less flexibility with a personal loan because you can’t just make a tiny minimum payment. If you run into a situation where money is tight, you could risk falling behind on your loan. And just one late payment can cause your credit scores to drop dramatically. So make sure you can afford the payment on the personal loan before you consolidate your debt.

2. You’re Hoping for Better Credit Scores

Credit card balances affect your credit scores differently than personal loan balances. In fact, using a personal loan to consolidate credit cards may actually help your credit scores. Why? Because with revolving debt like credit cards, credit scoring models will compare your balances to your available credit limits. If you are using a significant portion of your available credit on one or more of your credit cards, you will have a high “debt usage” ratio, which can lower your credit scores. (Wonder if your debt usage is hurting your credit scores? You can get a free credit report summary from Credit.com to find out.)

By contrast, most personal loans are categorized as “installment” debt, and those balances are treated differently. (This guide explains how debt affects your credit scores.) LendingClub says that 77% of borrowers who used their platform to get a loan for debt consolidation purposes saw their credit scores increase within three months, with an average increase of 21 points.

There’s no guarantee your credit scores will go up if you get a consolidation loan, but if high debt usage is hurting your credit scores, you may want to consider this option.

3. You Want to Simplify

Juggling multiple monthly payments can be stressful. Using a debt consolidation loan to pay off multiple credit cards makes it easier to ensure your payments are made on time each month. It’s a lot easier to keep track of one due date, than say, three or four.

Want to make things even simpler? Set up automatic payments (autopay) for your new loan, and start counting down the months until you are debt-free.

4. You Need More Money

Credit card credit limits often start out at $5,000 to $10,000 or less, depending on your credit rating and other factors. What happens if you need more than that? You may want to look into a personal loan. Many lenders offer loans up to $25,000. That’s enough to handle most financial emergencies, or to allow you to consolidate several credit cards into one monthly payment.

5. You Want to Save Money

If you have high-rate credit card debt, you may be frustrated to learn — like my friend — that most of your monthly payment is going toward interest, not toward paying down the balance. Getting a loan with a lower interest rate helps tilt that math in your favor, and can save you a lot of money in the long run. Again, returning to LendingClub as an example, in a survey of its borrowers, it found that over 70% of respondents reported using a loan from its platform to pay off another loan or credit cards, and reported the interest rate “was an average of 7 percentage points lower than they were paying on their outstanding debt or credit cards.”

An alternative option would be to transfer higher-rate balances to a credit card with a very low, or even 0%, interest rate. But keep in mind those offers usually last from 12 to 18 months, and most assess a balance transfer fee of up to 4%. The winner of our Best Balance Transfer Credit Cards in America ranking this year, Chase Slate, currently offers a 0% balance transfer for 15 months with no annual fee. (You can read a full review of Chase Slate here).

Note: It’s important to remember that interest rates, fees and terms for credit cards, loans and other financial products frequently change. As a result, rates, fees and terms for credit cards, loans and other financial products cited in these articles may have changed since the date of publication. Please be sure to verify current rates, fees and terms with credit card issuers, banks or other financial institutions directly.