Did you know that the average American has more than $6,000 in credit card debt? Whether you’ve got a lot less—or a whole lot more—one thing’s for sure: it’s expensive. While convenient, credit cards often come with interest rates ranging from 16% to 24% or higher, plus annual fees, late fees, processing fees…you get the idea.
If you feel like there’s no way out of your high-interest credit card debt, you’re not alone. Countless borrowers feel trapped, but we’ve got good news. You may be able to pay off your balances faster and save money with a personal loan for credit card debt, also known as a credit card consolidation loan or debt consolidation loan.
Read on for more about how to use a personal loan to pay off your credit cards, the pros and cons of payoff loans, and how you can get started today.
Personal loans to pay off credit cards: The pros
In reality, the average credit card often comes at a high cost, especially when compared to a personal loan. Using a personal loan to consolidate your credit cards may allow you to pay off the same amount of debt in less time—and at less cost to you.
Let’s take a look at some of the other advantages of using a personal loan to pay off debt:
- You could get a lower interest rate. While your interest rate will vary based on factors like your credit history, credit score, and debt-to-income ratio, you could qualify for a low-interest personal loan—or at least a loan with a lower interest rate than your credit cards. That means that you can use more of your money to pay off your balance instead of your accrued interest.
- You’ll have fewer monthly payments. If you have multiple credit cards, you know how stressful it can be to juggle payment deadlines. With a personal loan, you can consolidate your bills into one fixed monthly payment, cutting out the juggling act and allowing you to focus your time and energy on things that bring you joy.
- You’ll have fixed rates, set loan terms, and a structured repayment plan. While many credit cards have fixed interest rates, some use a variable rate that changes based on external indexes like the Wall Street Journal’s prime rate. If the prime rate increases, your monthly payments will increase, too.
When you choose a personal loan, you can typically count on fixed rates and clearly defined loan terms. You’ll know exactly how much you’ll pay each month and when you’ll pay it. Even better, you’ll have a clear end date in sight.
- You could increase your credit score. Using a personal loan to repay your credit card debt could increase your credit score in a few ways. First, a personal loan will add to your credit mix, or the different types of credit lines you have on your report.
Diversifying your credit mix shows potential lenders that you can manage multiple lines of credit. It’s one of the factors that goes into your credit score, too, so it’s worth improving it when possible.
Taking out a personal loan can also lower your credit utilization rate, or the amount you currently owe compared to your credit limits. Generally speaking, it’s best to keep your credit utilization rate under 30%.
By using a personal loan to pay off your credit card debt, your credit utilization will fall to 0%—well below the ideal rate. You’ll likely raise your credit score, too, since your credit utilization rate determines about 30% of the number.
Using a credit card loan to pay off debt: The cons
Personal loans can be an easy, affordable way to pay off your credit cards, but they may not be right for everybody. In fact, they can even have some negative outcomes.
Before you file your application, consider these downsides of using a loan to erase credit card debt:
- You may not qualify for a lower interest rate. In a perfect world, you could apply for a personal loan and instantly get a great offer with low rates and easy monthly payments. But the world isn’t quite that perfect. If you have a low credit score, your loan may have rates as high or higher than what you’re currently paying.
- You could increase your debt. Believe it or not, taking out a personal loan to pay off your credit cards could actually increase your debt if you don’t manage your spending.
Consider this: you currently owe $10,000 on 3 credit cards. You get approved for a $10,000 loan and pay off the total balance, leaving you with no credit card debt. If you’re not careful, you could be tempted to use your credit cards and rack up new debt on top of your personal loan.
- Your credit score could take a hit. Personal loans can increase your credit score, as we discussed earlier. However, they can also reduce your score by a few points, at least at first.
In most cases, lenders will perform a soft credit pull when you start the pre-qualification process. Soft pulls allow them to view your credit history and provide personalized rates. If you like the loan terms and decide to accept, your loan provider will then perform a hard credit pull.
Hard credit pulls appear on your credit report and may knock your credit score by a few points. Still, you’ll likely boost your credit score in the long run, as long as you repay the loan on time and manage your spending.
Pay off your credit card with a loan in 5 easy steps
If you’re ready to make financial freedom a reality, consider paying off your credit cards with a personal loan as a great place to start. You can even apply online, making it easier than ever to compare lenders and shop around for the best rates.
The application process usually varies from lender to lender, but you can get started by following the five steps below:
- Prequalify when possible. By prequalifying for a personal loan to pay off credit card debt, you’ll get a better idea of the available loan amounts, how much interest you’ll pay, and the terms of the loan. From there, you can narrow down your list of potential lenders, such as those who offer affordable loans to borrowers without good to excellent credit.
- Shop around for the best rates and loan terms. Take it from us: it’s always a good idea to compare loan offers before signing onto a new loan. First, compare major loan features like repayment terms, APRs, and interest rates, but don’t stop there. Instead, take some time to learn about additional fees, including origination fees, prepayment penalties, and late charges.
Then, do some research on each provider’s customer support resources. While it may not seem important now, solid customer service can come in handy if you ever run into a technical problem or experience a tough season.
- Apply for the loan. Once you find a loan that makes sense for your needs, complete the application in full and provide the lending company with all the requested information.
Doing so will speed up the approval process and help you get your money faster. Make sure to double-check your personal and financial information, too. You don’t want a typo to hold up your loan disbursement.
- Use the money to pay off your debt. After you’ve submitted your application and gotten approved for your loan, your loan provider will typically transfer the funds from your personal loan to your bank account so you can pay off your balances.
- Make payments on your personal loan. Now that you’re free of your credit card debt, it’s time to celebrate—and start paying off your personal loan. You may be able to pay it off sooner thanks to lower interest rates and set monthly payments. But remember: as long as you’re making timely payments and sticking to your budget, you’re taking the necessary steps to say goodbye to credit card debt for good.
Thinking about a personal loan for credit card debt? Consider this first
Personal loans can significantly improve your financial wellness, but only if you use them for the right reasons. If you’re only considering a personal loan so you can make a purchase you can’t afford, you’ll just increase your debt—and your financial anxiety.
But if you’re ready to get out of the cycle of revolving debt and minimum payments, a personal loan to pay off credit card debt may be able to help. Just make sure you do your research, find a trustworthy personal loan provider, and actively plan to manage your expenses and avoid more debt in the future.