More than half of Americans are carrying credit card debt. Even more frustrating? Americans owe an average of $5,875 in credit card debt. With a 25% annual percentage rate (APR), the average American could be paying over $1,468 in interest, or about $122 per month, creating a scary debt trap. Even if you’re carrying $1,000 in credit card debt, you could end up paying $250 per year that could go toward savings, a fund vacation or other goals.
Fortunately, a personal loan or balance transfer to a 0% APR credit card can help you pay off the debt faster. A personal loan or credit card consolidation loan will help you reorganize multiple payments into a single, fixed monthly payment to pay off the debt over a set term. Read on to understand how to use a personal loan to pay off credit card debt.
Quick Answer: Can I Use a Personal Loan to Pay Off Credit Cards?
Yes, you can use a personal loan to pay off credit cards. In many cases, that’s a smart move as it will let you pay off the debt over time with a lower interest rate than credit card interest rates. The exception? If the debt is on a card with an introductory 0% APR and you’ll pay it off before paying interest, that will save you more.
Understanding Personal Loan vs. Credit Card Debt
A personal loan is a type of debt for a fixed amount with a fixed interest rate and terms. For example, you could get a personal loan for $5,000 with a 7% interest rate for five years. That would allow you to pay off credit card debt with fixed monthly payments of $99.01. If you want to speed up the timeline and pay it off in two years, you’d need to pay $223.86 and to pay the debt off in one year, you’d need to pay $432.63 monthly.
Credit card debt, on the other hand, is revolving credit, which means you can take on more debt or pay it off at any time. Credit card debt usually has higher interest rates, with a common credit card APR of 18% to 30%. If you have the income, you could pay off the credit card debt all at once. Find other benefits to paying off credit card debt fast.
Paying Off Credit Cards with a Personal Loan: Pros and Cons
Paying off credit cards with a personal loan can make sense for most people. Here’s an overview of the pros and cons.
Benefits
The benefits of paying off credit card debt with a personal loan include trading high-interest debt for potentially lower-interest debt. There are several benefits to getting a personal loan. Other pros include:
- You can pay off the credit card debt in full.
- You’ll usually get lower interest rates.
- You’ll have one monthly payment.
- You could pay off the personal loan faster without penalties (in most cases).
Drawbacks
While paying off credit card debt with a personal loan can help you clear the high-interest debt, it’s still swapping one form of debt for another. That means you haven't cleared the debt even if you’ve secured a lower interest rate. There are no guarantees that you’ll even get a lower interest rate. It’s important to shop around for options to find the best interest rate. Likewise, most personal loans come with fees you’ll want to calculate into the total loan cost.
Finally, to get the most out of consolidating debt, it’s important to only use a credit card for charges you can pay back each month. This can be challenging for many people, so there’s a risk of undoing the value — and interest savings — of consolidating credit card debt.
How to Pay Credit Card Debt with A Personal Loan
To pay off credit card debt with a personal loan, the first step is to apply for a personal loan. You can apply with an online lender, local bank or credit union. Many sites allow you to compare loan interest rates and terms online to help you choose the best lender for your needs.
When you’re approved for a personal loan, you’ll receive a lump sum for the loan value that you can use to pay off the credit card debt. You’ll also receive the loan terms, including the interest rate, loan term in months or years and fees. Remember to double-check interest rates, terms and fees. And before selecting a lender, check whether you have options to pay back the loan ahead of time. Learn more about how to get a personal loan.
Choosing the Right Personal Loan to Pay Off Debt
When choosing the right personal loan to pay off debt, consider factors such as:
- Interest rates
- Loan terms
- Fees and loan amount
- Early repayment fees
Shopping around and comparing different offers is important to find the best loan.
Managing Credit Card Debt: Alternatives to Personal Loans
In addition to a personal loan, you could consider alternative options such as a balance transfer, negotiating for a lower interest rate or debt settlement. For example, if you apply for a credit card with a 0% APR introductory offer for 12 to 24 months, you could make a balance transfer and pay off the remaining debt during the introductory period. Most credit cards charge a balance transfer fee of 3%. On a $5,000 balance transfer, you’ll pay $150 for the balance transfer but then save on interest over the 12 to 24 months with 0% APR.
You also have the option to contact your credit card company and negotiate a lower interest rate or more favorable terms. In rare cases, you might ask for debt settlement, which means a creditor agrees to accept less than the amount you owe as full payment. In that case, you could pay off the debt faster without worrying that you could get sued over that particular debt. Find more tips on negotiating credit card debt.
Should You Consolidate Debt?
Escaping credit card debt is an essential step in building long-term wealth. For that reason, consolidating debt with a personal loan can be an important step to taking control of your finances and wealth. Any solution to get out of the debt cycle can help build momentum for future financial planning. Is a personal loan a permanent solution? No, but it can give you the breathing space to take control of your finances while creating a budget and finding side hustles to earn more. Ready to get started? Find the best personal loans here.
Frequently Asked Questions
Will my credit score go up if I get a personal loan to pay off my credit cards?
In most cases, you will see an increase in your credit score if you get a personal loan to pay off your credit card debt. How much of a score boost you’ll see depends on various factors, including the amount of debt compared to available credit and your current credit score.
Is a personal loan to pay off credit cards smart?
Getting a personal loan to pay off credit cards is a smart idea for many borrowers. A better idea is to only charge what you can pay off in full each month to avoid future credit card debt.
Is it necessary to provide collateral for a personal loan?
No, it’s not necessary to provide collateral for a personal loan.
About Alison Plaut
Alison Plaut is a personal finance writer with a sustainable MBA, passionate about helping people learn more about financial basics for wealth building and financial freedom. She has more than 17 years of writing experience, focused on real estate and mortgage, business, personal finance, and investing. Her work has been published in The Motley Fool, MoneyLion, and she is a regular contributor for Benzinga.