Paying off Credit Card Debt With a Personal Loan

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Reviewed byAlvin Yam, CFP
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Reviewed byAlvin Yam, CFP
Edited byCasie McCoskey
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Updated: March 22, 2024

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A personal loan typically provides you with a lump sum of money upfront, which you can use for a variety of purposes, ranging from financing major purchases to covering unexpected expenses. Another common use for personal loans is paying off credit card debt. This loan is often called a “debt consolidation” loan and lets you collapse high-interest credit card debt into a single payment with a lower interest rate.

Credit cards often come with higher interest rates, which can significantly impact your financial health. High interest can cause your balances to balloon, making it harder to pay off debt. While using a personal loan to pay off credit card debt can be a smart strategy, it's still good to assess if it's the best option for you. Weighing the benefits and drawbacks can help determine if it can provide the financial relief you seek.

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Benefits of Paying off Credit Card Debt With a Personal Loan

Personal loans are practical options for paying off high-interest credit card debt. By recognizing how a personal loan can aid in managing credit card debt effectively, you can ensure you're making a choice that supports your long-term financial health and stability.

Lower Interest Rates

Credit cards generally come with higher interest rates compared to personal loans. As of November 2023, the average credit card interest rate is 22.75% on accounts carrying a balance, according to the Federal Reserve. In contrast, the average interest rate for a 2-year personal loan is 12.35%.

Lower interest rates on personal loans mean more of your payment is dedicated to reducing the loan principal rather than just covering interest. This can significantly speed up the process of reducing your overall debt.

Lower interest rates also translate into potentially lower overall borrowing costs. When the interest on a loan is lower, the total amount you need to repay over the life of the loan decreases. This makes a personal loan a cost-effective solution compared to the high interest accrued on credit card balances.

Streamlined Single Payments

Using a personal loan to pay off credit card debt effectively streamlines your financial obligations into one. Instead of juggling multiple credit card bills, each with its own due date, interest rate and minimum payment, you have a single loan to focus on. This singular focus makes it easier to manage your finances and reduces the likelihood of missing a payment, a common risk when handling multiple debts.

Having just one monthly payment also helps with budgeting. You can plan your finances with greater clarity, knowing exactly how much you need to set aside each month for debt repayment. This predictability in financial planning helps you maintain a stable and disciplined approach to debt repayment.

Faster Debt Management

With a personal loan, you can use the funds to settle all your credit card bills at once. By doing so, you immediately eliminate multiple sources of high-interest debt, replacing them with a single, lower-interest loan. This consolidation not only simplifies your debt but also accelerates the repayment process.

Unlike credit cards, which often tempt with minimum payments that barely cover interest, a personal loan has a fixed repayment schedule. This ensures that payments consistently contribute to reducing the principal amount. As a result, you can see a clear timeline for becoming debt-free.

Improved Credit Score

Using a personal loan to pay off credit card debt can positively influence your credit score in several ways. Consistent on-time payments on the personal loan are a key factor. Regular, punctual payments are reported to credit bureaus, demonstrating financial reliability and responsibility, which are critical components of your credit score.

Additionally, paying off credit card debt with a personal loan can significantly reduce your credit utilization ratio, a major factor in credit scoring. Credit utilization ratio refers to the amount of available credit you are using. By clearing your credit card balances, you lower this ratio, which credit scoring models favorably view, as it suggests prudent credit management.

Taking out a personal loan also diversifies your credit mix. Credit scoring algorithms consider the variety of credit types you manage. Adding an installment loan like a personal loan to your credit history, which may primarily consist of revolving credit like credit cards, shows your ability to handle different types of credit. This can further enhance your creditworthiness.

MONEYGEEK EXPERT TIP

Paying off your credit card debt is only one aspect of debt management. You can use other strategies to avoid challenging financial situations, including the following:

  • Decide on a payment approach for your credit card debt. Applying pay-down strategies can help you design a structured process if you need to pay off balances on multiple cards.
  • Manage your spending. Paying off your credit card debt won’t do much good if you rack it up again.
  • Seek credit counseling if you need professional help.
  • Consider debt consolidation.

Drawbacks of Paying off Credit Card Debt With a Personal Loan

While using personal loans to pay off credit card debt offers advantages, it's wise to recognize that this strategy also carries potential risks. By also considering the drawbacks, you can determine whether this approach aligns with your financial goals and circumstances, ensuring a more comprehensive and responsible debt management plan.

Adds Another Debt

While personal loans can help you pay off credit card debt, they also represent another type of debt. Opting for a personal loan means committing to fixed monthly payments, typically over two to five years. This commitment requires careful consideration and planning.

When you take out a personal loan, it becomes a part of your financial obligations and must be factored into your household budget. Unlike credit card payments, which can vary in amount and may offer some flexibility in terms of minimum payments, personal loan payments are a fixed expense. As such, they require a more disciplined approach to financial management.

Comes With Fees

Personal loans can come with various fees that significantly add to the total cost of the loan. One of these is the origination fee, which covers the cost of processing the loan application. This fee can be a percentage of the total loan amount and is typically deducted from the loan proceeds, reducing the actual amount you receive.

Another potential fee is the prepayment penalty, which is charged if you pay off the loan earlier than the agreed-upon term. This fee can penalize borrowers who are able to clear their debt sooner than expected. Some lenders may also charge a late payment fee for missed or delayed payments.

For these reasons, you should thoroughly review and understand the fee structure of a personal loan before committing, as these additional costs can affect the loan's affordability and your overall financial strategy.

Lower Interest Rate Not Guaranteed

Interest rates on personal loans are typically determined based on various factors, including your credit score. A relevant aspect to consider is that a lower interest rate is not guaranteed, especially for individuals with less-than-ideal credit scores.

Lenders view credit scores as an indicator of creditworthiness and risk. If your credit score is on the lower end, it might signal to lenders a higher risk of default, leading them to offer higher interest rates to mitigate this risk. Sometimes, a low credit score can even result in denying the loan application altogether.

Uncontrolled Spending Behavior

Paying off credit card debt with a personal loan can provide a false sense of financial relief, leading to the temptation to use credit cards again before you pay off the loan. This behavior can result in a cycle of debt, where new credit card balances grow even as you're paying off the personal loan, effectively undermining your debt management efforts.

As such, it's wise to adopt a responsible approach to credit card use while repaying a personal loan. Keeping credit card balances low or at zero while you focus on loan repayment is key to ensuring that you don't end up in a more challenging financial situation than when you started. This requires financial planning and a commitment to changing spending habits.

How to Get a Personal Loan to Pay off Credit Card Debt

Taking out a personal loan to pay off credit card debt can be a strategic move toward financial stability. It’s a process that requires careful planning and understanding of the steps involved. By knowing how to navigate the process of acquiring a personal loan, you can ensure that this financial decision aligns with your goals and circumstances.

1
Determine the amount you need

Assess the total balance of your credit card debt to understand how much you need to borrow. This includes adding up all the debts across different cards to get a clear picture of your total liabilities. It’s good practice to borrow just enough to cover your debt, but having a slight buffer is also a good idea. It may come in handy if you end up with a lender that charges an origination fee.

2
Shop around for lenders

Research various lenders to find the best terms and interest rates. Consider banks, credit unions and online lenders, as each may offer different advantages. Some may even offer better rates for the same loan amount and repayment terms. Knowing these can help you find the best option for your needs.

3
Get prequalified for a personal loan

Prequalification gives you an idea of the interest rates and loan terms you may qualify for based on your credit profile. This step usually involves a soft credit check, which doesn't affect your credit score. Not all lenders have a prequalification process. But if you find one that does, going through the process is an excellent strategy.

4
Accept an offer and apply

Once you find a suitable offer, complete the formal application process. This will involve a hard credit check, which can impact your credit score. Provide the lender with all necessary documentation and information to process your loan application.

5
Use the proceeds to pay off credit card debt

After receiving the loan, use the funds to pay off all your credit card balances. Note that the amount of time before you receive your funds depends on your lender. Some may disburse funds on the same day of approval, while others can take three days or longer.

6
Control or avoid the use of credit cards

To prevent falling back into debt, control or limit your credit card usage while you pay off the personal loan. Try to avoid accumulating new credit card debt, which can negate the benefits of the consolidation. If you need to use your card, try to stick to small purchases you can pay off in full monthly.

7
Develop a solid plan to pay off the personal loan

Create a budget and set up a payment plan to consistently pay off your personal loan. Consider the loan’s repayment term and interest rate to plan your monthly payments. Sticking to this plan will help you make timely payments on your loan and improve your financial health.

How to Choose the Best Personal Loan

Finding the best personal loan to pay off your credit card debt is essential for effective debt management. To do that, consider several key factors when comparing loan offers. These include:

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MONEYGEEK EXPERT TIP

Personal loan interest rates fluctuate over time, but refinancing can lower repayment costs and help you pay off your loan sooner. Refinancing involves applying for a new loan from a different lender at a lower rate. This allows you to pay off the original loan and replace it with a new loan at a lower monthly payment due to decreased interest charges.

Note that lenders typically require good credit for refinancing, and origination fees may eat into the amount you save. — Alvin Yam, CFP®

Alternative Solutions to Paying off Credit Card Debt

Paying off credit card debt with a personal loan is a viable strategy, but it might not be the best fit for everyone. Here are some alternative solutions to consider as you work toward paying off your credit card debt:

  • Balance Transfer Credit Cards: Balance transfer credit cards allow you to transfer the balances of your high-interest credit cards to a new card with a lower interest rate, often 0%, for a promotional period. This strategy can provide temporary relief from high interest, allowing you to pay down the principal faster. Try to pay off the balance before the promotional period ends, as the interest rate can spike afterward.

  • Debt Snowball or Debt Avalanche: These are two popular debt repayment strategies. The debt snowball method involves paying off debts from smallest to largest, building momentum as each balance is cleared. On the other hand, the debt avalanche method focuses on paying down debts with the highest interest rates first. Both strategies require discipline but can be effective in reducing overall debt.

  • Debt Settlement Services: Debt settlement services negotiate with creditors on your behalf to settle your debts for less than what you owe. However, they often require you to pay expensive fees. They also encourage you to stop paying your balances while negotiations are underway, which may result in late fees and penalties. It's a consideration for those with significant debt who are struggling to make minimum payments.

  • Home Equity Loans or HELOCs: If you own a home, using a home equity loan or a home equity line of credit (HELOC) to pay off credit card debt can be an option. These typically have lower interest rates than credit cards but require your home as collateral. Consider the risk of putting your home on the line and ensure you can meet the repayment terms before seeking this option.

Checking out the alternatives to personal loans for paying off your credit card debt may help you make a selection that better suits your financial circumstances.

FAQ About Using Personal Loans for Credit Card Debt

Paying off credit card debt with a personal loan is a viable option, but it's common to have questions about the process. MoneyGeek addressed some of these queries to provide you with valuable insight.

Can I go to jail for unpaid credit card debt?
How much credit card debt is considered normal?
Can I pay off my credit card debt early?
What is the minimum monthly repayment for a credit card?
How do you avoid credit card debt?
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The content on this page is accurate as of the posting/last updated date; however, some of the rates mentioned may have changed. We recommend visiting the lender's website for the most up-to-date information available.

Editorial Disclosure: Opinions, reviews, analyses and recommendations are the author’s alone and have not been reviewed, endorsed or approved by any bank, lender or other entity. Learn more about our editorial policies and expert editorial team.