Using Personal Loans for Credit Card Debt

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When credit card bills become difficult to handle, there are several solutions. One worth considering is using a personal loan to pay off your credit cards.

This strategy is a form of debt consolidation. Paying off credit card debt with a low-interest personal loan replaces high-interest monthly card payments with a single monthly personal loan payment. It can possibly save you money each month and help you pay off your credit card debt completely.

Benefits of Paying Off Credit Card Debt with a Personal Loan

Using a personal loan to pay off credit card debt has several advantages. Here are four:

  • Lower interest rates
  • Improve your credit score
  • Consolidate and simplify payments
  • Pay off your debt faster

Lower Interest Rates

If you aren’t able to lower your credit card interest rate, understand that personal loans typically have lower rates than credit cards. Personal loans must be paid back in a fixed time and, unlike credit cards, don’t provide access to additional funds.

The average interest rate on a 24-month personal loan was 12.33% in August 2024. The average interest rate on credit cards for the same month was 21.76%. That makes a big difference in your ability to pay off your credit card debt.

If you owe $15,000 on credit cards charging 22% APR, to pay it off in three years, you’ll pay $572 a month and almost $5,622 in interest. By consolidating that to a personal loan charging 13% interest, you pay $67 less per month and pay $2,428 less in interest over three years. Apply that $67 to pay the consolidation loan would pay it off faster and save more in interest.

Improve Your Credit Score

By consolidating your credit card debt, you lower your credit utilization rate, which is the amount of revolving credit you’re using divided by the amount you have available. A lower percentage can lead to better credit scores. Paying down your debt is another way to improve your credit score.

A personal loan also increases your credit mix, which is a factor in achieving a good credit score. It shows lenders that you’re responsible with money by carrying a multiple of credit and debt.

Consolidate & Simplify Payments

In addition to possibly making monthly payments more affordable, a personal loan to consolidate credit card debt also makes payments simpler. Instead of having to keep track of multiple payment-due dates, you’ll only have to deal with one. That helps prevent you from missing a payment and falling behind. It becomes easier to plan your payments and put aside money to pay down the loan more quickly. The more you do that, the more money you’ll save on interest charges over time.

Pay Off Your Debt Faster

By getting a lower interest rate through a personal loan, you can pay off your debt more quickly. More of your payment will go to the principal rather than interest. And, if your consolidation lowers your monthly payment, you can continue paying the earlier amount and the difference will pay down the debt even faster.

Drawbacks of Paying Off Credit Card Debt with a Personal Loan

Paying off credit card debt with a personal loan can be effective, but it’s not risk-free. There are several potential downsides:

  • Loans can lead to more debt
  • Lower interest rates are not guaranteed
  • Additional fees apply
  • Closing credit cards affects your credit score

Loans Can Lead to More Debt

Consolidating your credit card debt is a first step toward eliminating it, but you’ll also have to change the spending habits that put you in debt in the first place. If you resume carrying a balance on your credit cards, you may end up in a worse situation. Concentrate your efforts on paying off the personal loan.

Lower Interest Rates Are Not Guaranteed

A big advantage of personal loans is their potential to offer lower interest rates. Potential, however, isn’t guaranteed to everyone. If your credit isn’t strong, you may not qualify for a personal loan, or the rate you qualify may not be better than what you’re being charged by your credit card companies. Shop around if you’re seeking debt consolidation loans for bad credit. Your credit score, loan amount and term length will determine what interest rate you can get.

Additional Fees

Personal loans typically charge an origination fee to open the loan. Other possible fees include a late payment fee, insufficient funds fee, prepayment penalties, or payment protection insurance. Find out what you may be paying before selecting a loan.

How Closing Credit Cards Affects Your Credit Score

Although paying off your credit cards can help your credit score by lowering your credit utilization rate, closing credit cards can have the opposite effect. It could hurt your credit by shortening your length of credit history. Credit rating services factor how long your credit accounts have been open, including the age of your oldest account and the average age of all your accounts.

How to Pay Off Credit Card Debt Using a Personal Loan

It’s not a terribly complicated process to use a personal loan to pay off your credit card debt, but there are several necessary steps.

  1. Research to find a loan with the lowest interest for which you can qualify based on how much you owe and your credit score, then apply for it.
  2. Pay off your credit card debt. Don’t be tempted to use the loan for any other purpose. Your goal isn’t to get further in debt but to begin the process of climbing out of debt.
  3. Commit to paying off your loan as quickly as possible. That’s the point of getting a low-interest-rate consolidation loan. Make regular monthly payments, and as long as your loan has no early repayment penalties, pay extra to zero out the debt.
  4. Give those credit cards a rest. This is going to take some discipline. Only use your credit cards to buy what you can pay off each month. If you can’t do that, you can’t afford it.

Alternatives to Personal Loans for Credit Card Debt

Just because a method works for many doesn’t mean it’s right for you. There is more than one way to pay down credit card debt. Some solutions use other sources of money so you can choose the best way to consolidate debt for your circumstances. Consider the alternatives before deciding.

  • Nonprofit credit counseling: Nonprofit credit counseling services can help you manage your credit card debt by analyzing your overall financial health. A counselor will help you create a budget that includes cutting expenses and provides an action plan with debt solutions and alternatives available to you.
  • Balance transfer credit cards: A balance transfer credit card can make it easier for you to pay off your debt by consolidating your existing credit card balances onto a single card. This is especially effective if you use a balance transfer cards with a 0 percent introductory APR that gives you a year to as many as 21 months to pay down your balances while avoiding interest charges.
  • Debt settlement: A debt settlement service helps those in debt negotiate a settlement with their credit card company in which you pay less than you owe. Debt settlement companies often charge big fees, and it will hurt your credit score if you settle your debt instead of paying it off. But if your credit card is unmanageable, it’s an option to consider.
  • 401(k) loan: Most 401(k) retirement plans allow employees to borrow from their accounts up to 50% percent of their vested funds up to $50,000. The 401(k) loan must be repaid in five years, and there is no penalty for paying it off early. However, you may be required to repay the loan in full if you leave your job. If you don’t, the unpaid loan balance will be considered taxable from your retirement account, and you could face a 10% federal tax penalty on the unpaid balance unless you are at least 59½ years old.
  • Home equity loan or home equity line of credit (HELOC): If you have equity in your home, you may be able to access it through a home equity loan or home equity line of credit to pay off your high-interest credit cards and consolidate that debt into a single monthly payment. Interest rates for home equity loans or HELOCs are much lower than credit card rates. Home equity loans give you the cash in a lump sum and have fixed interest rates but may include closing costs or other fees. HELOCS provide access to a line of credit, but they often have variable interest rates and annual fees.
  • Debt avalanche or debt snowball: Another way to attack credit card debt is by making extra payments on one of your cards. 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. With the debt snowball method, you pay off the debt with the lowest balance first. Neither method is a quick fix, and you have to be disciplined about spending so you don’t add to the debt on your other cards.
  • Negotiating a lower interest rate: Contact your lenders and ask for a rate reduction. They’re more likely to consider it if you have a history of paying consistently and on time.
  • Hardship programs: If you have become unemployed or are going through an unexpected financial crisis, see if your credit card company has a hardship program. Such programs may waive payments for a time.

Living Without Credit Card Debt

Let’s say you successfully pay off your credit card debt. Good for you! Now what?

Here’s an idea: Commit yourself to paying off your credit card each month. It’s a big part of achieving a good credit score that will make your financial life much easier. There are all sorts of benefits of good credit. You’ll qualify for better mortgage and car loan rates, and it can even affect your insurance rates.

This may be a big adjustment, but there are ways to minimize credit card usage. Use debit cards for online purchases and travel. Create a budget and determine to live within your means. Save money for big expenditures rather than buy them on credit.

Work with a Nonprofit Credit Counselor to Ease Your Debt

A nonprofit credit counseling agency can be a valuable resource for debt help. Credit counselors can help you with budgeting, consumer credit, money, and debt management. Counselors look over your financial situation, examine your income and expenses, review your credit report, and help you develop a personalized plan to solve your money problems. Counseling sessions can be done by phone, online, or in person. Sessions usually last about 40-45 minutes.

If you’re struggling with credit card debt, that could be time well spent.

About The Author

George Morris

In his 40-plus-year newspaper career, George Morris has written about just about everything -- Super Bowls, evangelists, World War II veterans and ordinary people with extraordinary tales. His work has received multiple honors from the Society of Professional Journalists, the Louisiana-Mississippi Associated Press and the Louisiana Press Association. He avoids debt when he can and pays it off quickly when he can't, and he's only too happy to suggest how you might do the same.

Sources:

  1. N.A. (2024, August 1) Finance Rate on Personal Loans at Commercial Banks, 24 Month Loan. Retrieved from https://fred.stlouisfed.org/series/TERMCBPER24NS
  2. N.A. (2024, August 1) Commercial Bank Interest Rate on Credit Card Plans, All Accounts. Retrieved from https://fred.stlouisfed.org/series/TERMCBCCALLNS
  3. N.A. (ND) What is the Length of Your Credit History? Retrieved from https://www.myfico.com/credit-education/credit-scores/length-of-credit-history
  4. N.A. (ND) Considering a loan from your 401(k) plan? Retrieved from https://www.irs.gov/retirement-plans/considering-a-loan-from-your-401k-plan