Should I Get a Personal Loan to Pay Off My Credit Card Debt?

Credit cards’ revolving credit limits, minimum payments, and variable interest rates can make managing and paying down balances difficult. Just as you’re making progress, an unexpected expense pops up, you pull out your card, and your balance is on the rise again.

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If you want to change things up, taking out a personal loan to pay off your credit cards could be a smart strategy. It’s not magic—you need to pay off the new loan. But the loan might have a lower interest rate or monthly payment, allowing you to save money in the long run.

Is it worth it to get a personal loan to pay off debt? 4 reasons why a personal loan could work for you

There are many strategies for paying off credit card balances, including the debt snowball and avalanche methods and balance transfer credit cards. You can also consolidate credit card debts with different types of loans, such as a home equity loan or line of credit. 

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But personal loans are a popular option—so popular that they’re sometimes called debt consolidation loans—for four reasons.

1. You’ll have a single payment and a specific payoff date

You can often choose from several repayment periods, such as three or five years. The repayment term will affect your monthly payment and interest rate, but no matter what you choose, you’ll know exactly when the debt will be paid off. 

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Personal loans also tend to have fixed interest rates, which means you also have a fixed monthly payment for the life of the loan. And they’re unsecured loans, so you don’t risk losing your home or other collateral. 

2. You might save money with a lower interest rate

Personal loans could have lower interest rates than credit cards. By refinancing to a lower-rate loan, your debt will accrue less interest—giving you more money to pay down the debt faster or spend in other ways. But the interest rate you receive can depend on your creditworthiness, loan amount, and repayment term, and you can compare lenders to see which offers you the lowest rate.   

3. You might be able to lower your monthly payment

Your monthly payment will depend on the loan amount, interest rate, and repayment term. However, you might find that the personal loan has a lower monthly payment than your combined credit card payments. 

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There’s usually a trade-off to consider. A longer term and lower monthly payment will free up money now, but you’ll pay more overall. A shorter-term loan has a higher monthly payment, but you get out of debt sooner and save money overall.

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Personal loans usually don’t have prepayment penalties, so even if you choose the longer term, you could save money by paying off the loan early. 

4. Your credit score could increase

Credit scoring models treat revolving and installment debts differently, and taking out a personal loan to pay down credit card balances can actually increase your credit scores. The exact impact depends on your overall credit profile and how you manage your credit going forward. But traditional and online lenders typically report your account to all three credit bureaus, and your on-time payments can help you build a good credit history. 

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The credit utilization ratio on your credit cards—the percentage of their credit limits that you’re using—is also an important scoring factor. Paying off the balances decreases your utilization, which can quickly increase your credit score. However, if you start to accumulate credit card debt again, your credit score could drop. 

The pros and cons of using personal loans to pay off credit card debt

Although personal loans are a popular option, consider the pros and cons before applying. 

Advantages: from lower interest rates to simplified payments

The primary benefits come down to the potential savings and simplicity that consolidating credit card debts with a personal loan may offer. 

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• Fewer monthly payments to manage
• Know your payoff date
• Fixed and potentially low interest rates
• Smaller monthly payments
• May increase your credit score

Downsides: potential fees and no guarantees 

A personal loan won’t necessarily be the best fit for your financial situation because of the drawbacks.

• Some loans have origination fees, which could be as high as 12 percent, that are taken out of the loan’s proceeds. 
• You might need good to excellent credit to get a low interest rate.
• There’s no guarantee you’ll get approved for a loan that’s large enough to pay off your credit cards. 

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A personal loan also won’t solve the core issue if you have credit card debt because of overspending or compulsive shopping. You’ll need to address these first. Otherwise, you could wind up back in credit card debt while you’re paying off a large personal loan.

How to use a personal loan to pay down credit card debt

If you decide a personal loan is a good fit, here are five steps you can take to find and compare loan offers. 

List your credit card debts

Make a list of all your current credit card balances—the total will be your target loan amount after origination fees. Also write down the cards’ interest rates and compare it to your loan offers. 

Check your credit score

Your credit score can impact your eligibility and loan offers. Although you won’t know which type of credit score the lender will use, you can check several of your scores to get a good sense of where you’re at right now. You may need a score that’s at least in the high 500s to qualify, but a higher credit score is better. 

Compare lenders and try to get pre-approved

Review lenders websites to find their: 

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• Requirements
• Loan amounts
• Fees

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Lenders often advertise interest rate ranges as well, but don’t focus too much on that to start. Instead, you can try to get pre-approved with several lenders to see the loan terms that you could realistically receive.

Submit an application

Once you gather several pre-approved offers, complete the application for the best one. You may need to submit identification or verification documents and then sign a final loan agreement before receiving the funds. 

Pay down credit card balances and start making loan payments

Some lenders can send payments directly to your credit card companies. Alternatively, you’ll get the money in your bank account and have to make the credit card payments. Continue making your usual credit card payments until you’re sure the balances are paid off, including any interest that accumulated since you first applied for the personal loan.

Ava can make comparing personal loan offers easier

Shopping for personal loan offers is an important part of finding a good loan. However, you might not want to go through the same pre-approval process multiple times, sign up for multiple accounts, or deal with all the emails that will likely follow. 

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Ava takes some of the hard work off your plate by finding you personal loan offers based on your credit profile. Learn more and find your offers on the Ava app’s offers page.