You can use a personal loan to consolidate and pay off credit card debt. A personal loan allows you to pay off your credit card balances, then repay only your personal loan rather than worry about juggling multiple credit card balances.

But keep in mind that in order for this to be effective, two things must be true:

  1. The personal loan must be large enough to pay off all your balances
  2. The personal loan must offer a lower interest rate than your credit cards

According to the credit bureau TransUnion, the average balance of new personal loans in 2022 was $8,085[1]. That amount is more than enough to cover the average consumer’s credit card debt, which means that it’s generally feasible to consolidate debt using a personal loan.

The Pros and Cons of Using a Personal Loan to Pay Off Credit Card Debt

While you can use a personal loan to consolidate your credit card debt, does that mean it’s a good idea? Before you make a final decision, you’ll need to consider the pros and cons of personal loans to pay off credit card debt.

✔️ Pros

There are a number of reasons why it makes sense to use a personal loan to pay off your credit card debt.

1. A Single, Consistent Payment

Is your credit card debt spread among multiple credit cards? If so, then it can be challenging to keep up with different monthly deadlines. And if you miss a payment, you run up expensive fees and harm your credit.

Consolidating your debt allows you to replace multiple monthly payments with a single payment. At the very least, it will be easier to plan your budget and keep track of your monthly bills, which can lead to less stress.

2. Lower Interest Rates

The average personal loan interest rate is 10.81%, and the average credit card interest rate is 23.65%[2] [3]. There’s a good chance that you can get a personal loan with a better rate than your credit cards, but it will depend on your credit score.

A lower interest rate also means that you’ll spend less over the course of the loan, which may prevent you from going deeper into debt due to high-interest credit cards.

3. Get Out of Debt Faster

While you can spread your payments out over time, a personal loan might also help you get out of debt faster. By paying a lower interest rate, you’ll be able to devote more of your payment to the principal, paying off the loan faster.

4. Boost Your Credit Score

A personal loan can improve your credit score in three distinct ways:

  1. A personal loan can improve your credit mix (the variety of accounts you’re using)
  2. On-time payments will be reflected on your credit report.
  3. Debt consolidation using a personal loan lowers your credit utilization ratio.

Your credit utilization ratio refers specifically to the percentage of your credit limit you’re currently using. Paying off your cards with a personal loan eliminates your account balances, which can give your credit score a boost.

❌ Cons

Despite these advantages, there are some potential drawbacks to using personal loans to pay off credit card debt.

1. Not Everyone Qualifies for a Personal Loan

Personal loans are generally not hard to get, but they can be harder for those with a less-than-stellar credit score. If you’re already struggling with credit card debt, there’s a possibility that your score has dropped far enough to jeopardize your eligibility for a personal loan.

Even if you find a lender that approves you for a personal loan, you may not receive the loan amount or interest rate that makes debt consolidation feasible.

2. Your Personal Assets Could Be in Jeopardy

If you have a low credit score, you can improve your chances of receiving a personal loan by putting up collateral. This is known as a secured personal loan, which requires you to use your property (such as an auto loan, investments, or even your home) as collateral.

On one hand, this can give you access to favorable interest rates. But the flip side is that the lender can seize your property if you fail to repay the loan.

3. Favorable Interest Rates Depend on Your Credit Score

The goal of debt consolidation is to pool your credit balances into a single loan with an interest rate lower than that of your credit card company. But if you have low credit, you won’t necessarily qualify for the most favorable loan terms.

In other words, using a personal loan to pay off credit card debt might not save you any money at all since you’ll be paying a comparable interest rate either way.

4. Additional Fees May Apply

Lenders often assess additional fees, including the following:

  • Application fee
  • Origination fee
  • Prepayment penalty
  • Late payment penalty
  • Payment protection insurance

These fees aren’t necessarily prohibitive, though it’s important to run the numbers to ensure that the money you save will offset any additional costs associated with the personal loan.

5. Lower Credit Score

When you apply for a loan, your lender will perform a hard credit inquiry, which can temporarily lower your credit score.

Fortunately, the impact on your credit report is temporary, and once you start making regular payments on your loan, you should see your score improve. But if you intend to apply for another financing in the immediate future (e.g., buying a car), even a small hit to your credit score can make a difference.

⚠️ A Word of Caution: Stop Using Your Credit Cards

Keep in mind that if you use a personal loan to pay off your credit cards, it’s important that you stop using your credit cards for all but the most essential purchases. Otherwise, you’ll only add to the balance you’re working hard to pay off.

If you miss a credit card payment, you’ll only tack on late fees and potentially damage your credit.

Alternatives to Using a Personal Loan to Pay Off Credit Cards

If you decide that a personal loan is not your best option, you have several alternatives.

1. Balance Transfer Card

A balance transfer card allows you to pay off your credit card balance with another credit card. As the name suggests, you can transfer balances from other accounts and then pay down the debt on your balance transfer card.

Some fees may still be involved, but you can expect lower interest rates and the potential for 0% interest if you have strong credit and the ability to pay off your debt quickly.

This is a good choice if you have good credit and the balances you need to pay are relatively small.

2. Credit Counseling and a Debt Management Plan

If you’re struggling with your credit, then credit counseling may help. A financial counselor can help you assess your options and make the best choice for you.

Credit counseling agencies offer debt management plans. You will make a single monthly payment to the agency, which will pay your creditors and negotiate for better terms. This is a good way to consolidate debt if you have bad credit.

3. Bankruptcy

When all else fails, you may need to file for bankruptcy. This is a last-resort option, but it is a way to stop debt collection efforts and eliminate your unsecured debts.

Bankruptcy is a complex legal process administered by the US bankruptcy courts. Before you consider bankruptcy be sure you know how bankruptcy works and that you understand the difference between Chapter 7 and Chapter 13 bankruptcy.

The Urgency of Eliminating Your Credit Card Debt

Credit card debt is an imminent threat to many Americans. The interest rates are extremely high, and the ability to slide by for another month by making a minimum payment makes it easy to fall deep into a debt trap.

Consolidating credit card debt with a personal loan can be a way out if your credit is still good enough to qualify for a personal loan with a competitive interest rate and you have the discipline to stop using your cards until the personal loan is paid off!

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