The process of using a personal loan to pay off credit card debt is called debt consolidation. By taking the proceeds of a personal loan to pay off credit card debt, you can eliminate multiple monthly high-interest card payments and consolidate the debt into one monthly personal loan payment—often at a reduced cost.
Personal Loans for Credit Card Debt
Using a personal loan to consolidate your credit card debt is a common form of debt consolidation. Credit cards typically charge interest rates between 20% and 30%, although some cards may charge up to 36%. On the other hand, personal loans tend to have lower rates, ranging from 8% to 20%. As a result, consolidating your credit card debt with a personal loan can save you money on interest while also combining your debts into one payment. If you understand the risks, a personal loan can be a viable way to pay off credit card debt.
Pros of Using a Personal Loan To Pay Off Credit Card Debt
The best credit card debt consolidation loans can help you get out of debt faster compared to making the monthly minimum credit card payments. But a personal loan offers other benefits, as well.
1. You May Earn a Lower Interest Rate
Personal loans charge an average interest rate of less than 16%. The best personal loans are even cheaper than that if you have a high credit score. That means you could consolidate bills, decrease your total interest payment and even pay off your debt sooner.
2. Consolidation Streamlines Payments
If you make many different credit card payments every month, debt consolidation can be a good idea as you’ll give yourself only one monthly due date and payment.
By taking out a personal loan to consolidate your credit card payments, you’ll make one monthly payment on your loan. Reducing the number of payments can help you not fall behind during repayment.
3. You Could Boost Your Credit Score
Taking out a personal loan increases your credit mix, which makes up 10% of your score. It shows creditors and lenders that you’re responsible with money by carrying many different types of credit and debt.
You’ll also lower your credit utilization by paying down your debt. If you pay off your credit cards with a personal loan, your utilization will go down to 0%. However, a good interest rate is an important factor to consider before taking out a personal loan, so review the average personal loan interest rates before you apply.
4. You May Repay Debt Sooner
If you’re only making minimum credit card payments every month, it could take you years or even decades to pay off your balances, depending on how much you owe.
With a personal loan, you can pay off your credit card debt right away and set up a payment plan to repay your personal loan. Terms vary based on how much you borrow and your lender, but a short term can ensure you repay your debt quickly.
Cons of Using a Personal Loan to Pay Off Credit Card Debt
There are potentially negative consequences to consolidating credit card debt by taking out a personal loan, including the cost. Consider these drawbacks, as well, before making a decision.
1. Taking Out a Personal Loan Could Lead to More Debt
A personal loan means you’re borrowing more money. If you take out a personal loan to pay off your credit cards and start to carry a balance on those credit cards again, you’re racking up more debt than you had before.
A personal loan for credit card consolidation isn’t a debt eliminator; use it only if you’ve gone through other options, like increasing credit card payments every month or compared a balance transfer to a personal loan.
2. You’re Not Guaranteed a Lower Interest Rate
Personal loans tend to offer lower interest rates compared to credit cards, but that might not be the case for everyone. If you don’t have stellar credit, you might not meet the credit score requirements for a personal loan. If you qualify for a personal loan with bad credit, your interest rate may not be any lower—and could be higher—than what you’re paying now.
3. Personal Loans Have Fees, Too
Some lenders charge many different fees, like a late payment fee, origination fee and insufficient funds fee, for example. Be mindful of this as you’re comparing personal loan lenders.
How To Get a Personal Loan To Pay Off Credit Card Debt
Using a personal loan to consolidate high-interest credit card debt is one of the most common uses for a personal loan. Here’s how to get one:
- Review your credit score. Check your credit report and fix any errors. Gather the application documents you’ll need to prove your financial situation and identity before you apply for a personal loan.
- Compare multiple options. Get prequalified with as many lenders as possible. Record the personal loan requirements for each offer, including the APR, monthly payment amount, term length and any other features that’ll help determine which offer is best for you.
- Check the total costs. Use a credit card calculator to see how much it would cost to pay off your current debt, including fees and interest. Do the same with a personal loan calculator to determine if it’ll save you money; don’t trade one debt for another if it’ll cost you more.
- Apply with the top lender. Once you compare lenders, proceed with your application for your best option. Be prepared to provide any additional details the lender may need, if requested.
- Receive and repay loan funds. If you’re approved, your lender may send you the funds directly, or, in some cases, they’ll send the funds directly to your creditors to pay off the credit card debt for you. Sign up for autopay so you can avoid any missed payments and late fees.
Alternatives To Using a Personal Loan To Pay Off Credit Card Debt
Balance Transfer Credit Card
You could apply for a new credit card that allows you to transfer balances from existing credit cards, perhaps at a lower interest cost to you. The benefits of a credit card balance transfer include:
- Interest-free payments. If you qualify for a 0% APR balance transfer, you won’t pay any extra interest charges for the promotional period, which would allow you to pay down your balance without interest.
- No balance transfer fee. Most credit cards charge a fee when you transfer a balance, but you can find some that waive the balance transfer fee.
- New perks. If you have decent credit, you might qualify for a new card that offers cash back, travel perks or other types of deals for cardholders.
The drawbacks of a credit card balance transfer include:
- Eventual interest charges. If you don’t pay off the balance by the end of the promotional period, you could face interest charges on the remaining balance.
- Loss of promotional offer. Even though interest isn’t accruing, you’re still responsible for making minimum payments every month. If you don’t, you could lose your promotional offer and interest will start to add up on your entire balance.
- Not having a high enough credit limit. Even if you do qualify, your entire balance might not transfer over because the card issuer offers you a lower credit limit than you need. This means you’re on the hook for the balance on your new card and any old cards that carry the remaining balances.
Debt Snowball or Avalanche
You may also decide the best way for you to tackle your credit card debt is by focusing extra payments on one of your cards. There are two primary ways people go about this: either the debt snowball or debt avalanche method.
The benefits of using one of these methods include:
- Avoiding new credit lines. If you don’t have great credit or don’t want to take on additional debt, these methods let you focus on paying down your debt with what you have, not adding to your burden.
- Focusing on high interest. With the debt avalanche method, you pay off your debt with the highest interest rate first. This could save you more in the long run.
- Focusing on little wins. The debt snowball method focuses on paying off the debt with the lowest balance first. If you need a quick win, this might be your best bet.
Of course, these payoff methods also have their drawbacks. You may find:
- It’s a slow process. Increasing your payments with only the cash you have on hand right now means you may pay off your debt slower compared to a personal loan.
- Your budget doesn’t work with it. If your budget is already stretched thin as it is, you may not have any extra money to put toward higher credit card payments.
How Do You Consolidate Credit Card Debt Without Hurting Your Credit?
When you apply for a new credit account to consolidate your debt, like a personal loan, your lender typically runs a hard credit check, resulting in a hard inquiry that can impact your score.
However, you can take steps to combat this temporary drop and boost your credit score over time. For example, if this is your first time applying for a personal loan, it will improve your credit mix, which makes up 10% of your FICO score. Once you open a debt consolidation loan, you can boost your score by making on-time or early payments—your payment history makes up 35% of your FICO score.
So while you’ll most likely experience an initial temporary drop in your credit score when consolidating your credit card debt, you can rebound your score by following responsible credit practices.
