Should you pay off a loan with a credit card?
Whether it’s a good idea to pay off a loan with a credit card via cash transfer depends on your individual financial circumstances and how much it’ll cost you overall.
It usually only makes sense to pay off a loan with a credit card:
- if the cost of borrowing is cheaper overall (e.g. you can get a 0% interest deal on a card)
- if you save money – even after any potential early repayment charges on your loan and transfer fees on your credit card
It’s also worth thinking about the following pros and cons:
- you might be able to access a better interest rate - if you’re paying a higher interest rate on your current loan, or your credit score has increased since you took it out
- the overall cost of borrowing could be less on a money transfer credit card – you need to compare the Annual Percentage Rate (APR) to find out
- some credit cards offer 0% introductory periods, which are worth taking if you can pay the money back before the deal ends and interest is applied
- you may be able to clear multiple debts with a money transfer credit card – this allows you to consolidate them into one payment per month
- you may end up paying more in total – make sure you work out how much you’d pay in total, including interest and fees to see which option is cheaper
- a transfer fee on the card and early repayment charges on your loan may apply
- 0% deals often only last for a fixed period if you can’t pay off the balance in full during that time then interest will apply, normally at a high rate
- the credit limit on the card might not cover your loan – in this case, you’d have two lots of debt to pay off, instead of just the loan
Also bear in mind that 0% interest offers can be withdrawn if you spend on your card, make cash withdrawals, or pay less than the minimum amount each month.
Other ways to pay off a loan
There are ways you can pay off your loan without using a credit card. Make sure you consider these before making a decision. We’ve listed the five common methods below:
1. Use savings
If you have savings it might be best to use them to pay off your loan. Interest rates on savings are usually lower than what you’d pay on a loan, so it can make financial sense to put some (or all) of your savings towards clearing your debt. Doing so will also boost your credit score, helping you to access better deals in the future.
2. Make overpayments
Making overpayments on your loan will enable you to pay it back more quickly. But you need to make sure you can afford to pay extra before you stump up the cash.
Remember, early repayment charges may apply. If they are steep you could end up paying more in total than if you continue paying your loan as normal. Make sure you check your credit agreement for all the details.
3. Consider putting forward a full and final offer
If you have the cash to pay off most of the loan early (but not all of it), it may be worth putting a full and final offer forward to see what the lender says. They might accept it or come up with a counteroffer.
Bear in mind, if the lender accepts a reduced offer, the debt will show as ‘partially settled’ on your credit file, not ‘fully satisfied’. This could potentially put some lenders off if you go to them for credit in the future. However, six years after the debt defaulted or settled (whichever came first), the debt will automatically drop off your credit file.
Ultimately, it’ll be up to you to work out whether it makes financial sense to pay it off early, depending on your individual circumstances. If you need some help regarding this, you could get in touch with StepChange, a free UK debt charity.
4. Switch to a cheaper loan
If your credit score or debt-to-income ratio has increased since you originally took out your loan, it may be worth checking if you’re eligible for a better rate on a new loan. Research current loan options on the market using:
- comparison websites – these compare different loans across the market
- a broker – these can advise you on deals within their portfolio of lenders
- lenders’ websites – or you can also get an overview of their products by phoning them or visiting their branches
Just make sure you look at the APR (which is the total cost) of any loans you’re comparing, including the interest rate and fees, so you can accurately work out which is the cheapest option. The APR is expressed as a percentage.
5. Consider getting a debt consolidation loan
If you have more than one loan you need to pay off, a debt consolidation loan may be worth looking into. These allow you to combine multiple debts (including loans and credit cards) into a single monthly payment, to one lender. This alleviates the stress of having different payments coming out each month.
It’s only worth doing if it works out cheaper overall. You’ll need to add up the total cost of all your debt and compare it to the total cost of a debt consolidation loan to decide whether this is a good option. Just make sure if you do take out a debt consolidation loan, it covers all your debt – otherwise, you’ll just add to the pile.
Where can I go for debt help?
If you’re struggling with debt, taking out a credit card might not be the best idea. There are several organisations that can offer free debt advice, including:
- Citizen’s Advice - they provide free advice and can put you in contact with organisations who can help
- StepChange - they offer free debt advice online or over the phone and can speak to creditors on your behalf
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