Money Management

You can use a personal loan to pay off a credit card balance, and doing so might save you money. Read on to learn more. 

During the first quarter of 2023, U.S. credit card balances reached $917 billion, while personal loan balances hit $225 billion, according to TransUnion. So it’s pretty clear that both are fairly popular borrowing options.

But the interest rate you pay on a credit card balance may be a lot higher than the interest you’re charged on a personal loan. As such, if you owe money on a credit card, you may want to consider paying it off with a personal loan. This could be a smart strategy, but you should be mindful of the pitfalls that might ensue.

When you use a personal loan to pay off a credit card

The lower the interest rate on your debt, the less it’s apt to cost you. When you use a personal loan to pay off a credit card, you borrow a sum of money and use your loan proceeds to wipe your credit card balance out. You then pay off your personal loan over time, only at a lower interest rate, thereby reaping some savings.

For example, it may be that you’re paying off a $5,000 credit card balance at 18% interest. If you’re able to take out a $5,000 personal loan at 8% interest, well, that’s a big difference in interest rates. So going this route could make sense.

But if you’re going to take out a personal loan for the express purpose of paying off a credit card, make sure you use your loan proceeds for that intended purpose. And also, don’t borrow extra money just because.

You may be tempted to take out a $6,000 personal loan when you owe $5,000 on a credit card to give yourself some leeway. But remember, the whole point of this strategy is to minimize the amount of interest you’re paying on your debt. If you borrow extra, you may not achieve that goal.

What about a balance transfer?

A personal loan isn’t your only option when you’re trying to pay off a credit card with a high interest rate. You can also look at doing a balance transfer, where you move your balance from one card to another. Many balance transfer offers give you a limited-time 0% introductory rate, and that reprieve from paying interest could help you get ahead of your debt. Note that you may have to pay a balance transfer fee, often amounting to about 3% of the balance you’re moving over.

In fact, you’re not going to find a personal loan at 0% interest. So going the balance transfer route may be a better option if you’re convinced you’ll be able to pay off your debt before that introductory period comes to an end. If not, then a personal loan may be your better bet.

All told, using a personal loan to pay off a credit card balance is a fairly common practice. And if you owe money on multiple credit cards, it could be a good way to consolidate your debt and make it easier to manage.

But make a point not to borrow extra money in personal loan form if you’re going this route. And also, shop around for loans so you’re able to walk away with the most competitive interest rate you can get.

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Want to reach millionaire status? It starts with making the right moves in your 20s. Read on to learn more. 

There are 5.3 million millionaires living in the U.S. And all told, millionaires make up about 2% of the total U.S. population.

Clearly, that’s a pretty small percentage. But that doesn’t mean you can’t be a part of it.

If that’s your goal, though, then you should know that the moves you do and don’t make in your 20s could spell the difference between becoming a millionaire or not. If you’re eager to reach millionaire status, here are some key things to focus on in your 20s.

1. Learn to not spend your entire paycheck

Your 20s are generally the period of life when you first start to earn a steady income. And that’s an exciting thing. It means you can finally pay your essential bills without having to go to your parents for help or fall back on credit cards. And it also means you might even have money left over for fun stuff — things like concerts and travel.

But if your goal is to become a millionaire eventually, then you’ll need to get into the habit of not spending your paycheck in its entirety. And the sooner you do, the easier it will be to uphold that practice.

In fact, one thing you may want to do is set up automatic transfers each month to a brokerage account, IRA, or 401(k) plan. That way, you’ll have money leaving your checking account you won’t be tempted to spend.

2. Steer clear of needless debt

You may have to borrow money in the form of a mortgage loan to finance a home purchase. And similarly, you might have to sign an auto loan if you need a car and can’t afford to buy one outright. These are reasonable debts to take on, because you need a roof over your head and a means of reliable transportation.

But there’s a big difference between signing a mortgage or auto loan and racking up a credit card balance for things like vacations and leisure. Of course, some people end up with credit card debt not due to frivolous spending, but due to things like unplanned car repairs or medical bills.

The point, however, is that if you’re able to avoid credit card debt, you won’t lose money to the interest these cards are known to charge. And that gives you more cash to invest.

3. Put your money into the stock market

Many people think that investing in stocks is risky. And the reality is that you do take on some risk when you put money into the stock market. But if your goal is to grow a large amount of wealth over time, then consistently investing in stocks is the way to go. And if you make a point to diversify your portfolio, you can help minimize your risk of losses along the way.

Over the past 50 years, the stock market has delivered an average annual 10% return before inflation, as measured by the performance of the S&P 500 index. So, let’s say you begin investing $300 a month in stocks during your 20s, and you continue doing so until your mid-60s so that all told, you’ve given yourself a 40-year investing window. If your portfolio returns an average annual 8%, you’ll end up with almost $1.6 million.

You may prefer that your 20s be laid-back and carefree. While there’s nothing wrong with enjoying your 20s, you can’t simply ignore your personal finances if your goal is to become a millionaire. Instead, make a point to manage your income savvily, avoid debt, and invest from a young age. If you make that effort, then you, too, might one day join the ranks of the small but notable percentage of Americans who get to call themselves millionaires.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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