Tips on How to Pay Off Credit Card Debt with Personal Loan  

“Borrowing from Peter to pay Paul” is as old as the Middle Ages and as modern as taking out a personal loan to pay off credit card debt. Borrowing to cover credit card debt has its pros, cons, potential pitfalls, and plentiful choices, including secured loans, unsecured loans, and balance transfers to new credit cards. But when you enter the land of Peter and Paul, it’s important you tread carefully to be sure you are not solving one money problem by creating another.

In 2022, 82% of 10 U.S. adults had a have credit card, and roughly half of them carry unpaid balances from month to month, according to analysis from the U.S. Federal Reserve.¹ In separate communications, the Federal Reserve also notes, “heavy revolvers” — individuals who carried a balance every month on their credit card for the last year — pay more than $60 in interest each month on average. “Light revolvers” — individuals who carried a balance on their credit card in 1 to 11 months of the last 12 months — pay approximately $15 in interest each month.²

Paying hundreds or even thousands of dollars of credit card interest a year is not just a drain on your personal finances. Carrying a credit card balance can also lower your credit score, if your credit utilization ratio is too high.^3,4 And a bad credit score, in turn, can drive up other costs—for your car loan, insurance, or cell phone.^5,6

You may even be managing multiple credit card balances. In this case, consolidating all your credit card debt under one loan could simplify your personal financial management and help you avoid late payments, interest charges, and the possible fees and interest rate increases associated with missing payments.

If your balance is high, a personal loan may be better for paying off credit card debt. Personal loans tend to carry a lower interest rate than credit cards, which may help make your payments more affordable.⁷ While there are no hard-and-fast rules, several factors will determine whether you should opt for a personal loan to pay off credit card debt—and which kind of loan.

One factor is how much debt you have to transfer. Another factor is your credit score, which could play a deciding role—from the interest you pay to whether you can even qualify for a loan.⁸ Your debt-to-income ratio may also be examined.

Secured loans—such as a home equity loans—may be easier to get, with lower interest rates and higher borrowing limits than unsecured loans. Using your home as collateral lowers the risk to the lender but raises yours—you could lose the roof over your head if you default.⁹ Approvals for unsecured loans are typically based on available financial data and credit scoring.

Instead of opting for a loan to pay off their cards, some consumers consider balance transfers to new credit cards, especially for smaller amounts of debt. A balance transfer fee in the single digits might be required, but some card companies waive that fee to attract business. Card companies may also offer a 0 percent introductory APR for at least 6 months, but you need to be sure the offer applies to balance transfers as well as purchases. Examine any no-interest balance transfer offer with care to avoid mistakes.

Planning, budgeting, and economizing could improve your chances of success in paying down any debt. You should consider plotting exactly what amount you will pay every month on your new loan or balance transfer card, and how you will find the money. Otherwise, late fees and increased interest rates could set you back again.

Think about how you got into this situation in the first place. If non-essential spending is the culprit, consider identifying those areas of heavy spending and cut back. Otherwise, new debt could begin to balloon the moment you take out a loan to pay off your old debt.

While you can take out a loan to pay off credit card debt, it’s not a simple choice. You’ll want to analyze a multitude of options from many financial services companies, because which option works best for you will depend on several factors. Whether you’re considering a secured or unsecured personal loan or transferring your balance to another card, fees and interest rates can come as a surprise. Finally, you’ll likely need a plan in order to succeed.

Related Articles