As of the first quarter of 2022, Americans had a total of $841 billion in credit card debt, according to the New York Federal Reserve Bank’s report. Experian reports that the average person has a credit card balance of $5,525. This means you aren’t alone if you have credit card debt.
“There’s a good chance that Americans’ total credit card balances will soon reach a new record high, marking a sharp reversal from the precipitous drop that occurred in 2020 and early 2021,” said Ted Rossman, a senior industry analyst at CreditCards.com. As it grows, you may find yourself seeking a source of relief. Fortunately, there are a few ways you can potentially help alleviate some of this debt. Personal loans can potentially be a smart option depending on your current financial situation and other considerations.
For some, taking out a loan for paying off credit card debt can help payments go faster and at a lower interest rate. Others may find it difficult to receive a low enough interest rate to make taking out the personal loan worth their while. With both pros and cons, understanding how personal loans may help your situation is a financially sound strategy.
Expert take from Ebony Howard:
“Taking out a personal loan to pay off credit card debt has its benefits when done consciously, if the terms of the loan are more favorable. Being cognizant of your ability to repay any amount that is borrowed whether as a loan or as an extension of credit is very important to your financial well-being. Ultimately the goal should be to eliminate debts while building a healthy credit history.”
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What is a personal loan?
A personal loan is a loan that can be used for just about any reason, including paying for:
- A large event, like a wedding
- A vacation
- Medical bills
- Home improvements
- Car repairs
- Emergency expenses
- Debt consolidation
Personal loan amounts can range from $1,000 to $100,000 and are repaid in monthly installments, that you can get from a bank, credit union, or online lender. Terms and interest rates vary depending on factors like your credit score and history, income, debt-to-income ratio, and the lender, though they typically range from 4.99% to 35.99%. They are also typically unsecured, meaning you don’t have to supply an asset as collateral for the loan.
Learn more: Everything You Need to Know About Personal Loans
How do they work?
Personal loans are borrowed from a financial institution and repaid over installments, or flat payments made each month until the loan is repaid. After applying for the loan, getting approved, and accepting the loan, the lender will deposit the loan funds as a lump sum into your bank account. You can then use those funds as you would cash for whatever you need.
You’ll begin paying the loan off right away plus interest, and once the loan is completely paid off, you’re debt-free.
Learn more: How do personal loans work?
How can you use a personal loan to pay off credit card debt?
Many people wonder is getting a personal loan for credit card debt smart. The process of paying off credit card debt by using a personal loan can be confusing, but breaking down this strategy into bite-sized chunks can help:
- Qualify and apply for a loan: The first step in this process is to receive a quote for a personal loan from a lender. This will require personal and financial information, along with a credit check.
- Agree upon terms of the loan: Any information regarding the tenor to repay the loan, the loan principal, and the interest rate along with any monthly payments will be discussed before accepting the loan.
- Receive your funds and make credit card payments: After you receive your funds in your checking account, you can use the money to pay off all your credit card debts
- Build a repayment strategy: It’s crucial to remember that you’ve only consolidated your debt, not gotten rid of it. Be sure to meet your monthly payments on the personal loan.
A personal loan for credit card debt is not a clean slate. By using this strategy, you can move your debt from different accounts with different interest rates to a single loan with a single interest rate. When done strategically, this can help you save money on interest.
Where do I get a personal loan to pay off credit card debt?
You can get a personal loan to pay off credit card debt from several places, including:
- Banks: While banks have stricter lending qualifications and higher interest rates, they do have the benefit of in-person customer service and support. It can also be helpful if you’re already a customer of the bank.
- Credit unions: You must be a member of a credit union to apply, but they typically have fewer restrictions than banks with more flexible eligibility requirements and lower interest rates.
- Online lenders: Typically, your fastest and easiest option to get a personal loan, they have the most flexibility when it comes to rates, qualifications, and working with borrowers who have poor credit.
Credit card debt relief options
Beyond relying on a personal loan to pay off your credit card debt, there are other options you can look at utilizing:
1. Debt settlement companies
Debt settlement companies are exactly what they sound like. Their job is to negotiate with the creditor(s) to reduce the amount of debt you owe. This is typically done by them taking on a portion of your debt in return for a percentage fee. If you have the funds to afford this option and want some of your debt reduced, it could potentially be an effective strategy.
2. Talk with your credit card company
In many cases, credit card companies will work with you to build a repayment plan or they may be able to reference resources you can turn to for help. At the end of the day, credit card companies want their money back, which is why they’re likely willing to help if you reach out for assistance.
3. Contact a credit counselor
A credit counselor can be an excellent resource for paying off debt. They teach you budgeting and financial skills all while walking you through topics such as debt consolidation and general information surrounding paying off debt.
Finally, bankruptcy is never an enticing option but it can help you get rid of your debt. Before choosing to go down this route, research whether or not the debt you owe is dischargeable. If it is, declaring bankruptcy will wipe the obligation away. Be aware that declaring bankruptcy has consequences, so evaluate this decision before making it.
When is it right to get a personal loan to pay off credit card debt?
You should consider getting a personal loan to pay off credit card debt if:
- You have multiple credit cards with debt.
- You want to consolidate your debt payments into one.
- Your credit score, history, and other factors will ensure you get a lower interest rate on the personal loan, or you have collateral or a cosigner that will help you qualify.
- The new monthly loan payments fit into your budget and you’re able to make the payments on time each month.
- You create a plan to not use your credit cards or create new, financially savvy habits to ensure you don’t get into credit card debt again.
Using a personal loan to consolidate debt isn’t for everyone, and it doesn’t get you out of the cycle of debt unless you change your spending habits. It’s important to change the habits that got you into debt in the first place and start using credit cards more wisely.
Is taking a personal loan to pay off credit card debt a good idea?
Taking out a personal loan to pay off credit card debt can help you pay off your credit card debt in full. And, because personal loans typically have lower interest rates, you’ll be able to pay off your loan faster and save money. Plus, one monthly payment is much more manageable than multiple payments, so you’re less likely to miss a payment and owe late fees.
However, personal loans are a type of debt, so even though your credit cards are paid off, you’re not debt free and still must make your monthly personal loan payments on time. It’s also important to note that you’re not guaranteed a lower interest rate. Rates are dependent on factors like your credit score and history, income, and debt-to-income ratio. If you have a poor credit score, you may not get a lower interest rate.
Personal loans also come with fees, which you should keep in mind as you’re comparing lenders.
Pros & cons of paying credit card debt with a personal loan
What happens when you pay off a credit card is the complete end of that debt, which should always be your goal. Getting a loan to pay off credit card debt can be a great idea but isn’t right for everyone. Debt consolidation is a tricky process that can either save you money or cost you money, depending on your financial situation. Understanding the various pros and cons of taking a loan to pay off credit cards is an important step in the decision process.
- All debt is consolidated into one loan at a single interest rate and a single monthly payment (assuming it is fixed)
- You can pay off credit card debt in full
- The potential to pay off debt sooner
- Assuming all payments are made on time and in full, you can see a boost in your credit score
- By consolidating debt, you streamline all potential credit payments into one
- Taking out a personal loan could lead to more debt if monthly payments are missed
- A lower credit score may not allow for a favorable interest rate on the loan
- Potential fees, such as an origination fee, could make the personal loan not worth the cost
Learning how to choose the best personal loans to pay off credit card debt requires adequate research before applying. Avoid settling for the first lender you find online, as certain lenders who you may already have a history with (such as a bank) may offer a better interest rate due to that history.
What to consider while paying off debt with a personal loan?
When shopping for a personal loan, a few factors to consider include:
- Interest rates: Find a lender who offers the lowest interest rate for your credit score. The higher your score, the lower your rate and monthly payment will be, and the less interest you’ll owe over the life of the loan.
- Terms: The longer the term, the lower your monthly payment will be but the more you’ll owe in interest over the life of the loan. The shorter the term, the higher your payment but you’ll owe less in interest. Repayment terms vary depending on the lender, typically ranging from 12 to 84 months.
- Fees: Most lenders charge fees, whether they are origination fees, late fees, prepayment penalties, or others. Evaluate each lender’s fees and determine which you’re comfortable with in the event you have to pay them.
- Loan amount: Not all lenders have the same minimum and maximum amounts you can borrow, and what you need depends on how much credit card debt you have. Also keep in mind that your credit score and income can impact how much you can borrow. Make sure you qualify for the loan amount you need.
- Customer service ratings/reviews: It’s really important the lender offers great customer service in the event you have questions or problems repaying your loan.
Once you get the personal loan funds, using them to pay off the credit card debt immediately can help save you money and simplify your payments. Don’t use the funds for anything else or you may remain in credit card debt. Then, pay off your personal loan as quickly as possible to avoid accruing interest.
Finally, you’ll want to avoid using your credit card as you pay off the personal loan, and start using your cards only for purchases that you can afford. That way you can avoid going into credit card debt again in the future.
Alternatives to personal loans to pay off credit card debt
As mentioned, using a loan to pay off a credit card isn’t the right choice for everyone. Those with lower credit scores may be unable to secure a favorable interest rate that actually makes a personal loan on credit card debt worth it. Others may simply want to see another type of strategy for paying off credit card debt that doesn’t require taking on another loan. Regardless, here are alternatives to personal loans for paying off credit card debt:
1. Balance transfer credit card: This type of credit card allows a holder to transfer the debt from their various cards to a single card. Many balance transfer cards offer perks such as a 0% APR for the first year or so.
Learn more: Best Credit Cards for Balance Transfers
2. Debt settlement services: In some cases, a borrower can reach out to debt settlement services to get their debt forgiven. During this process, the borrower typically needs to pay a lump sum portion of the debt in return for having the remainder of the debt forgiven.
3. 401(k) loan: If you are willing to sacrifice some retirement savings in the short term, a 401(k) loan often comes with a lower interest rate. Just remember where the money you are borrowing from is being taken out of. Additionally, if you change jobs, you will need to repay the loan within 90 days.
4. Debt snowball or avalanche: The debt snowball strategy is an effective strategy in which you pay off your smallest debt first and work your way up to the largest. By following this method, you roll the minimum payment you were making on that debt into the next-smallest debt payment.
5. Home equity loan or home equity line of credit: A home equity loan occurs when a lender agrees to lend you the requested funds, but the collateral on those funds is the equity in your home.
6. Talk to your credit issuer: In some cases, your credit issuer may be open to building a custom repayment plan that suits your finances more. Reach out to your credit issuer and see if they have any resources that may help in your repayment plan.
7. Debt management plans: Above all, one of the best alternatives to taking on a personal loan is to build a debt management plan. List out all your sources of debt and the repayments required in order to evaluate which sources of debt you should emphasize repaying first. This can also help you identify a better strategy, such as debt consolidation, that could help reduce your debt.
There are a few different ways to deal with credit card debt and find relief. Research the best option for your unique financial situation to ensure you are receiving the best help available.
Credit card debt vs. personal loan debt
All forms of debt are similar in principle, with credit card debt and personal loan debt not being an exception. For these types of debt, the biggest similarity is that a minimum payment is typically required each term for your account to not be considered in default. Assuming this minimum payment is met, but the full amount is not paid off, the remaining amount will begin accruing interest.
This is the primary difference between credit card debt and personal loan debt. The interest rate offered on personal loans is usually lower than that offered for credit cards. Additionally, personal loans have a predefined repayment period which provides a known end date, unlike a credit card to which you may be paying off debt forever.
How to consolidate credit card debt without hurting your credit?
Regardless of the debt consolidation strategy you use to help pay off credit card debt, the best way to avoid hurting your credit is to make on-time payments. Create a repayment plan and stick to it relentlessly until your debt is paid off. The point of debt consolidation is to bring all your debt payments to one place so that you don’t forget about making a payment.
This strategy is only effective if you make your payment completely and on time. If you do this, your credit score will likely begin to improve over time.
How do I qualify for a personal loan to pay off debt?
A few common requirements lenders will evaluate when determining whether to approve your loan application include:
- Credit score and history: While having a higher score will be beneficial and make it easier to get a low interest rate and better term, most lenders require you to have a minimum credit score of 670 or above for the best options. However, some lenders will accept scores of 600 or above, or even as low as 580. If you have a poor credit score, make sure to do your research to find a lender who will work with you.
- Income: Lenders also have income requirements to ensure the borrower is able to repay the loan. These minimums can vary by lender, from as low as $20,000 to $50,000 or more depending on your desired loan amount. You’ll be asked to show proof of income when you apply.
- Debt-to-income ratio (DTI): Your DTI is the portion of your gross monthly income that goes toward your monthly debt expenses, expressed as a percentage. Again, these requirements vary by lender, but typically you want a DTI of less than 36%.
- Collateral or cosigner: If you are applying for a secured loan, you must have an asset you can use as collateral (like a car, house, savings or investment account) or a cosigner to help you qualify.
How to choose and compare personal loan lenders?
As alluded to above, there are several factors that can impact the benefit you may receive from getting a loan to pay off credit cards. Your credit score, financial history, personal information, salary, and more can all play a role in the overall cost and benefit. There are a few steps you can follow when getting a loan to pay off credit card debt:
- Determine the exact loan amount you need: There is no reason to add more debt when consolidating your existing credit card debt. Figure out the amount of money you need to pay your debt in full and apply for that specific amount.
- Research different lenders: For those who have higher credit scores, banks will typically (not always) offer favorable interest rates on personal loans. Those who have substandard credit scores are more likely to receive a loan from a third-party lender, but this will have a higher interest rate. Regardless, consider various lenders and try to find an option with the lowest interest rate and few, if any, fees.
- Review terms of the loan offers: When comparing loans, there are a few main factors to consider: principal of the loan, tenor of the loan, monthly payments, interest rate, and any fees. Try to determine if you can easily make the monthly payments requested, and use a personal loan calculator to see what you are actually paying over the life of the loan.
- Accept the loan: Only after considering all the factors, deliberating between your offers, and viewing what your total repayment will be should you accept a loan offer.
How do I apply for a personal loan to pay off credit card debt?
Many personal loan applications can be completed online in just a few minutes, and you may get approved immediately or within the same business day. Before you fill out the application there are a few things you should prepare, and then once you begin the process there are additional steps to take:
- Check your credit score and take steps to improve it if necessary. Check your credit report for any errors and pay down as much debt as you can while also ensuring to make debt payments on time each month.
- Determine your loan amount. You must know how much you want to borrow before applying.
- Get prequalified. When comparing lenders, get prequalified online. This doesn’t affect your credit score but can give you a more accurate estimate of your interest rate, monthly payment, and other loan details to help you compare.
- Apply. Once you’ve chosen the right lender, fill out an application. You’ll be asked to submit personal information like your contact information, date of birth, Social Security number, and others. You’ll also be asked to submit proof of things like address, income, employment, and others. Having this information prepared ahead of time can make the application process smoother.
- Accept the loan. Once approved, you’ll be sent the loan agreement to review, accept and sign.
- Get the funds. The funds will be deposited in a lump sum into your bank account. You can then use these funds to pay off your credit card debt.
General advice for paying down debt
In general, the best way to get large amounts of debt off your plate is to combine as much as possible under one interest rate and payment per month. By doing this, you can reduce the risk of forgetting a payment, and only having a single interest rate will save you money. Use strategies that target smaller debt amounts first, that then roll up into the larger debt amounts you owe. This way, slowly over time, you will begin to reduce the amount of debt you have and more of your budget can go towards the larger principal payments you owe on a monthly basis.
As you look at how to get a loan to pay off credit card debt, you may wonder what happens if you fail to pay. If you have missed a payment by 30 days or more, your loan will be qualified as in default. The lender will contact the credit bureaus and your credit score will take a significant hit, even from one late payment. When the lender passes the loan off to collections, they may take you to court to legally get the sum total of what they are owed paid back. Overall, not paying a loan will result in penalties, fees, and more interest to build over time.
Assuming you have made all your payments on or before schedule, then paying off a personal loan can certainly help your credit! It’s important to note that paying off a personal loan can only go so far regarding your credit score. Maintain other healthy credit habits and keep all your various credit accounts paid off and up to date as well for the best results.
When people wonder is a personal loan better than credit card debt, the answer often comes down to interest rates. In general, a personal loan will likely have a lower interest rate than a credit card, which is one reason it can be viewed as a better option for a one-time payment. However, if your credit score is not great then the interest rate you are offered by lenders may not be better than a credit card.
There are several smart ways to consolidate debt but strategies such as: using a personal loan to pay off credit card debt, balance transfer credit cards, practicing healthy debt habits, and tapping home equity or 401(k) loans are all common strategies. Each strategy has pros and cons, so be sure to do proper research before deciding.
Some reports outline that the average American carries just over $6,000 in credit card debt. However, just because this is an average doesn’t mean it should be considered a goal. You should always aim to have no debt in your life unless absolutely necessary.
Make all your credit card payments on-time and in-full. Some may believe that by making the minimum credit card payment each month you avoid debt, but this isn’t true. What happens instead is that the remaining amount you haven’t paid starts to accrue interest, which can quickly become a debt spiral. Avoid credit card debt by making all your payments.
Learn more: Tips to Avoid Credit Card Debt