When you’re in debt, it can seem like your next paycheck can’t come soon enough. At some point, you might come to the conclusion it’s time to pay off your debt. But with average credit card interest rates more than 20%, it can seem like an upward struggle.
Should you take out a personal loan to pay off your debt?
It’s going to depend on how high your debt is, your payment history, and your credit score. According to Bankrate.com, to take out a personal loan, you generally need a credit score of 670 or above. And while you might get approved for a loan, there’s no guarantee you’ll get the best terms. Your interest rate could end up being the same or higher than the rate on your current debt.
Or look into a debt management program (DMP)?
Of course, if you have a good credit score and you’re not missing payments, a personal loan might be the right move for you to pay down debt. But if you’re making late payments or missing them all together, visiting a credit counselor and inquiring about a debt management program is a good option.
What is a debt management plan?
A debt management plan is a service offered by credit counseling agencies that’s designed to help you pay down your debt in three to five years. As opposed to a personal loan, with a debt management program, you don’t have to worry about how low your credit score is. Your counselor will work with your lenders to consolidate your credit cards or unsecured debt into one monthly payment and lower your interest rate. Through a DMP, your counselor will help keep you on track—and as you pay off your credit cards and make on time monthly payments, we often see credit scores increase.
The average credit score we see before a client enrolls in a debt management plan is 605, which means a personal loan likely wouldn’t be the right fit. The average credit card debt we see is about $19,185 with an APR at 22%, making repayment challenging. However, after we enter clients in a DMP, rates plummet to 6.8%—making paying your debt down a doable feat.
While a personal loan may be able to help some people pay off their debt, if your credit score is higher, you’re likely to end up paying more. A debt management plan doesn’t require you to take out a new line of credit or improve your credit score before getting help—and you get the support of trained counselors who will help you stick to your repayment schedule, so you can successfully pay off your debt.