Transferring a personal loan to a credit card can have both benefits and drawbacks. If you move a personal loan to a credit card, you'll still owe your debt, and depending on the interest rate structure on the card the cost of the borrowing may increase over time. However, if the transfer can align with your goals of ultimately getting out of debt altogether, it may be a good strategy. Fees and restrictions may apply to various transfers, so verify all the terms before you make a financial commitment.
You can transfer your personal loan to a credit card via a balance transfer. Credit card companies often provide debtors with balance transfer checks that work like ordinary bank checks. If you write a check for the outstanding balance of your loan and send it to your bank, your loan will be paid off and the credit card company will debit your account for the amount of the check. If you don't want to write a check, you usually can process this online by providing simple identifying information about your loan, such as what bank holds the note and how much you still owe. Transfers usually are processed in a few business days.
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The primary benefit in transferring a personal loan to a credit card occurs if you can save in annual interest charges. Since credit card companies always are eager to drum up new business, many offer a zero percent interest rate on transferred balances. If you're paying a high interest rate on your current personal loan, the savings could be dramatic. For example, a 10 percent interest rate on a $10,000 loan costs $1,000 in interest. Transferring this balance to a credit card via a zero percent transfer offer would eliminate this completely. You could pay your debt down faster if you used that $1,000 in interest savings to pay off your principal balance.
Many zero-percent balance transfer offers come with fees of three percent or more. While you won't pay interest on the transferred balance, you will have to pay a fee for the service. On a $10,000 loan, transfer charges could reach $300 or more.
Zero-percent transfer offers typically have an expiration date as well. After periods as short as six or 12 months, your promotional interest rate will increase to the standard credit card rate, which is often 15 percent or more. If you can't pay off your transferred balance during the promotional period, you may end up paying more in interest than you would have had you kept your loan at the bank.
Another consideration is what can happen to your credit report. Personal loans are considered installment loans when it comes to your credit score. If you already have credit card debt, having an installment loan can be beneficial to your credit score, as it shows you can handle multiple types of accounts. If you pay off the loan, you'll only be left with a single type of credit, revolving credit. By opening up a new credit card account, you'll also trigger another credit inquiry, which can ding your score a few points. With a lower credit score, any additional credit you might take out in the future, from a car loan to a home mortgage, might come with higher interest rates.