personal loan to pay off my credit card debt

Should I use a personal loan to pay off my credit card debt?

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One of the biggest drawbacks to credit card debt is how expensive it can be. If you don’t pay off your balance month to month, you’ll wind up paying interest, which can quickly add up considering the average credit card APR is 17.27%.

If you have a lot of high-interest credit card debt, you’ve probably considered numerous ways to pay it down more quickly. One of those options is taking out a personal loan and using the money to pay off your credit card debt. 

How successful a strategy this will be depends a lot on you and your financial habits.

“Consolidating debt onto a personal loan can be a bad idea. That’s because you’ve paid off your cards, but you have a new loan and access to new credit,” says Christopher Viale, president and CEO of Cambridge Credit Counseling. “People who consolidate credit card debt often wind up with the same amount of credit debt two years down the road because there’s no change in spending behaviors, just more debt.”

To be successful in using a personal loan to pay off credit card debt, you have to address the issues that got you into credit card debt in the first place. 

Related article: How to deal with credit cards and other debts during the coronavirus crisis

What is a personal loan?

Personal loans are consumer loans that tend to range in size from $1,000 to $50,000 and can be used for almost any expense. Approval for the loan is based on financial factors like your credit history and income. Most of these loans have terms from 12 to 60 months and come with set repayment schedules with a fixed interest rate.

Typically, personal loans are unsecured, meaning they don’t require you to put down collateral. If you want a better interest rate, and potentially an easier time being approved for the loan, you can secure it with collateral, but then you run the risk of losing that collateral if you default on the loan.

Related article: The pros & cons of secured and unsecured personal loans

When does a personal loan make sense?

First and foremost, you’ll want to make sure a personal loan would be a less expensive way to pay off your debt. For that to be the case, you’ll need to get a loan with an interest rate that’s lower than most or all of your credit cards. Which probably means you’ll need a good credit score. 

If you have good credit, a score of 680 and above, you might get a loan with an APR of between 13.5% to 15.5%. However, if your credit is fair or poor, you might only be eligible for an APR of between 17.8% to 32%, which could be a lot higher than your current credit card debt.

“It’s important to note that a personal loan doesn’t eliminate your debt — it’s the lower interest rates that give you relief,” Viale says.

You also have to make sure you can afford the loan’s monthly payments, which very likely will be higher than the minimum payments on your credit cards. You’ll need enough cash flow to cover those payments for the entire length of the loan (unless you pay it off early) with enough room left over to handle your other expenses. 

Related article: How can I get a personal loan if my credit is bad?

What to consider instead

Many credit card issuers offer 0% introductory APR offers on balance transfer credit cards. In that case, you can transfer your debt from high-interest cards and pay zero interest on the debt for the length of the offer — most last 12 to 15 months. If you think you can pay off all or almost all of your debt in that time frame, it can be a big win for taking care of your debt.

Keep in mind that many card issuers charge a balance transfer fee of between 2% and 5% for each transfer you make.

Can you handle a debt diet?

If all the pieces line up well — you get a lower-interest personal loan and you feel confident you can manage the monthly payments — taking out a personal loan to pay off your credit card debt could be a win-win. But you also need to commit to not running up your credit card debt again. Otherwise, you’ll wind up in worse shape than when you started, Viale says. If you’re even a little bit worried about your level of restraint, make it harder to access your credit cards by keeping them in a security deposit box or freezing them in a block of ice. 

If you don’t feel confident about keeping your spending in check, or are worried about paying down a personal loan, it’s best to consider less drastic options like tightening your belt and paying more toward your credit card debt or looking at balance transfer offers.

How Resolve can help

If you’re dealing with debt and not sure what to do, we’re here to help. Become a Resolve member and we’ll contact your creditors to get you the best offers for your financial situation. Our debt experts will answer your questions and guide you along the way. And our platform offers powerful budgeting tools, credit score insights and more. Join today.


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