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You might have several options for paying down credit card debt, and some people have had success taking out a personal loan—sometimes also called a debt consolidation loan—to pay off their credit cards.
Borrowing from one lender to pay another doesn't always make sense, but consolidating debts might result in a lower monthly payment and interest rate than your existing credit card payments. It also might be easier to pay off a debt when you have a fixed repayment schedule. However, deciding if you should try this approach will depend largely on your personal circumstances, loan offers and preferences.
Is Personal Loan Debt Better Than Credit Card Debt?
Although one isn't necessarily better than the other, there are some significant differences between personal loans and credit cards.
Personal loans are a type of installment debt and they generally have the following features:
- Fixed interest rates: Your interest rate will be set when you take out the loan.
- Fixed repayment terms: You may be able to choose your repayment term when you get the loan. Choices might range from two to eight years, but the specific options vary depending on the lender and your loan offers.
- Origination fees: Some lenders charge an origination fee and take the amount out of your loan's proceeds.
- Certainty: The fixed terms mean you'll make the same payment each month and know when you'll pay off the loan. The certainty can be reassuring and help you plan your budget, but it also means you don't have the flexibility to make lower payments if you're feeling squeezed.
Credit cards are a type of revolving debt with features that differ from personal loans:
- Variable interest rates: Credit card interest rates can rise or fall over time.
- No clear payoff date: Your credit card statement may show you how long it takes to pay off your credit card based on different monthly payments. But the actual timeline also depends on whether you use the card for new purchases.
- Different fees: Credit card fees can include an annual fee and various usage-based fees, such as a fee for making a balance transfer or late payment.
- Flexibility: You only have to make a minimum payment each month to avoid fees and keep your account in good standing. However, the flexibility also can make it hard to pay off credit card debt if you don't stick to a self-imposed repayment plan. Making only the minimum payment can also hurt your credit if you maintain a high account balance.
Personal loans and credit cards can also impact your credit scores differently. In either case, making on-time payments can help your credit, and missing payments can hurt it. And your current balance compared to your original balance on an installment loan is a scoring factor. But your revolving credit utilization ratio, or how much of your credit card limit you're currently using, can be more important.
In other words, having high credit card balances (relative to their credit limits) could be worse for your credit than having a large personal loan.
Should You Pay Off Credit Card Debt With a Personal Loan?
Applying for a personal loan and using the money to pay down credit card debt can be a strategic move that helps you get out of debt. However, you'll want to consider the pros and cons and how this strategy compares to other options.
The three main benefits of using a personal loan to pay off credit cards are:
- Potential interest savings: In general, personal loans tend to have lower interest rates than credit cards. In the fourth quarter of 2022, credit card accounts that were assessing interest had an average interest rate of 20.40% compared to the average 11.23% for 24-month personal loans, according to Federal Reserve data. A lower interest rate means less interest accrues each month and you can put more toward the principal balance or other expenses.
- Lower monthly payments: The monthly payment on the personal loan might be lower than the combined monthly payments on your credit cards.
- Fewer monthly payments: You'll also have fewer payments, which could be easier to manage. But remember that keeping your credit cards open might help your credit score, even if you don't use them, so it isn't advisable to close your accounts once the balance is zero.
The three main drawbacks to getting a personal loan to consolidate credit card debt are:
- Upfront fees: Origination fees could be as high as 10%, meaning you'll have to borrow more than you currently owe. But you might qualify for a lower fee—or no-fee—loan if you have good credit.
- No guaranteed loan amount or interest rate: You might not qualify for a large enough loan to pay off your credit cards completely. Or, you might only qualify for a loan that has a higher interest rate than your credit cards.
- Could lead to more debt: If you have credit card debt from overspending or don't make enough to afford your household necessities, the personal loan isn't a long-term solution. You might turn to your credit cards after paying them off and wind up deeper in debt.
You can use a personal loan calculator to get an idea of your monthly payment amount and how much you'll pay, including interest, over the life of the loan to help you decide if a personal loan is a good choice for you.
Personal Loan Calculator
†The information provided is for educational purposes only and should not be construed as financial advice. Experian cannot guarantee the accuracy of the results provided. Your lender may charge other fees which have not been factored in this calculation. These results, based on the information provided by you, represent an estimate and you should consult your own financial advisor regarding your particular needs.
How to Pay Off Credit Card Debt Without a Personal Loan
Focusing on paying off credit card debt is a top priority for many people because credit cards often have higher interest rates. But if a personal loan won't work for you, or you want to compare your other options, here are four common alternatives:
- Try a debt repayment strategy. Keep your credit cards as they are, but use any extra money you have to strategically focus on paying one card off at a time. Two popular strategies are the snowball approach—paying off the card with the lowest balance first—and the avalanche approach—paying off the card with the highest interest rate first.
- Consider a balance transfer. You can use a balance transfer to move debt between credit cards. If a card has a balance transfer offer, the balances you transfer will have a low or 0% interest rate during a limited promotional period. You might get an offer on one of your current cards, or you can apply for a balance transfer credit card that offers an introductory interest rate to new cardholders.
- Use a different type of loan to pay off credit cards. Rather than using a personal loan, you could open a line of credit or use a secured loan, such as a home equity loan or home equity lines of credit. It might be easier to qualify for large or low-rate secured loans, but be careful about using your home as collateral to pay off unsecured debt.
- Get on a debt management plan. Nonprofit credit counseling organizations might be able to help you set up a debt management plan to pay off your credit cards. A credit counselor may be able to negotiate fee waivers and lower interest rates that help you save money, and the plans often lead to paying off the debt within three to five years. However, you might not be able to use or open any credit cards during that time.
There may be other options as well, and the best choice will likely depend on your particular financial situation and preferences. Consider a few free options that won't impact your credit, such as getting preapproved for a personal loan and calling a credit counseling agency, to figure out which route might be best for you.
Compare Personal Loan Offers
If you think a personal loan might make sense, you can use Experian CreditMatch™ to get debt consolidation loan offers from multiple providers. Checking your offers results in a soft credit inquiry which won't impact your credit scores, and you can quickly compare the results to see which provider offers you the most favorable loan.
Learn More About Personal Loans and Paying Off Debt
- Best Online Personal Loan Lending Services for 2024
Compare your options and find the best online personal loan lending service in 2024.
- How to Pay Off Credit Card Debt
If you have credit card debt, these strategies can help you eliminate it faster and improve your financial well-being.
- What Can a Personal Loan Be Used For?
A personal loan can be used to consolidate debt, pay for unexpected expenses or for almost any purpose. Learning your personal loan options is essential.
- 5 Things Not to Use a Personal Loan For
Personal loans are a valuable financial tool. But personal loans aren’t always your best option. Here are five things you shouldn’t use a personal loan for.