Using a Personal Loan to Pay Off Credit Card Debt: A Complete Guide

Credit card debt can quickly spiral out of control with high interest rates and burdensome minimum payments. If you’re struggling under the weight of high-interest credit card balances, using a personal loan to consolidate and pay off your credit card debt may offer some relief.

In this complete guide, we’ll cover everything you need to know about using a personal loan to eliminate credit card debt, including:

• How it works
• Pros and cons
• Eligibility requirements
• Impact on your credit
• How to apply
• Alternatives to consider

How Does Using a Personal Loan to Pay Off Credit Cards Work?

A personal loan is an installment loan, meaning you borrow a fixed amount upfront and repay it in equal monthly payments over a set period of time. Personal loans generally have fixed interest rates and terms of 1 to 7 years.

When you use a personal loan to pay off credit card debt, you essentially take out a new loan and use the proceeds to pay off your existing card balances. Many lenders that specialize in credit card consolidation will even make payments directly to your creditors for you.

Once you pay off your cards, you’ll be left with just one monthly personal loan payment, rather than multiple credit card payments. This can simplify your finances, help you pay off debt faster, and potentially even lower your interest costs.

Pros and Cons of Using a Personal Loan to Pay Off Credit Cards

Here are some key advantages and potential downsides to keep in mind

Pros

• Lower interest rate – Personal loans often have lower rates than credit cards
• Fixed payment – Personal loans have a fixed payment vs. variable credit card payments
• Simplified finances – Combine multiple payments into one
• Pay off debt faster – Lower rates help you save on interest
• Improve credit – Loan payment history can help credit scores

Cons

• Credit check required – Applying requires a hard inquiry on your credit
• Origination fees – Some lenders charge 1% – 10% upfront fees
• Strict eligibility – Good credit often required to qualify
• Credit card temptation – You may be tempted to reuse paid-off cards

Personal Loan Eligibility Requirements

Since personal loans are unsecured, lenders want to mitigate their risk by lending to borrowers with good credit and income. Here are typical eligibility requirements

• Credit score – Most lenders require scores of 640 and above, but some have minimums as low as 580. The higher your score, the lower your interest rate will likely be. Those with bad credit can qualify with a cosigner.

• Income – Lenders usually want to see monthly income high enough to comfortably cover the proposed loan payment. Minimum income thresholds often range from $20,000 to $100,000 yearly.

• Credit history – Many lenders prefer at least 3 years of established credit history on your reports.

• Debt-to-income ratio – Your total monthly debt payments, including the new loan, usually cannot exceed 40% to 50% of your gross monthly income.

How Does a Personal Loan Affect Your Credit?

When used responsibly, a personal loan can improve your credit in a few ways:

• Lower credit utilization – Paying off credit cards lowers your overall revolving credit utilization, a key scoring factor.

• Mix of credit types – Adding an installment loan to your credit mix can benefit your scores.

• On-time payments – Making consistent and timely loan payments demonstrates responsible credit management.

That said, applying for a personal loan triggers a hard inquiry on your credit reports, which could cause a small, temporary drop in your scores. Only apply for an amount you can comfortably afford to repay on time each month. Missed payments can hurt your credit history significantly.

How To Get a Personal Loan to Pay Off Credit Cards

If you’ve decided a personal loan is right for your situation, here are the basic steps to apply:

1. Check your credit score so you know the rates you can likely qualify for.

2. Compare personal loan offers from multiple lenders to find the best rates and terms. Online pre-qualification makes this easy.

3. Choose a lender and complete their full application, providing income verification and other required documents.

4. If approved, accept the loan terms and determine the payoff amounts for each credit card.

5. Once funding is received, pay off your credit card balances immediately to stop interest accumulation.

6. Begin repaying your fixed monthly personal loan payment until it’s fully paid off.

Alternatives to Paying Off Credit Cards With a Personal Loan

While they can be useful, personal loans aren’t the only option for dealing with credit card debt. Here are a few alternatives to consider:

• 0% balance transfer credit card – Transfer balances to a card with a 0% intro APR period to pause interest temporarily.

• Debt management plan – Work with a nonprofit credit counseling agency to negotiate lower rates and consolidated payments.

• Debt settlement – Leverage lump-sum settlements for a portion of your balances as an alternative to bankruptcy.

• Budgeting and payment strategy – With discipline, create a budget, trim expenses, and pay extra each month to eliminate debt.

Is Using a Personal Loan to Pay Off Credit Card Debt Right for You?

Like any financial product, personal loans have pros and cons. Before pursuing credit card consolidation, have a clear budget and payoff plan. A personal loan makes most sense for those with good credit, moderate debt loads, and the ability to repay on time each month. Use diligently, and it can simplify your finances and help you pay off high-interest credit card debt for good.