How to use a personal loan to pay off credit card debt

If your credit card balance never seems to go down no matter how many payments you make, a personal loan could help. It might sound odd to trade one form of debt for another, but using a loan to refinance credit card debt can — in the right situation — save you hundreds of dollars in interest and improve your credit score.

How credit card refinancing works

Credit cards can have annual percentage rates (APRs) upwards of 30% — which is important because the APR indicates how high your interest payments are. But when you refinance, your credit card balances are paid off with a new debt, ideally with a lower APR.

You can use different types of debt to pay off your credit cards, including a home equity loan, a credit card balance transfer, and a personal loan for debt consolidation. In all scenarios, you would apply for the new debt (or use a 0% APR balance transfer offer on an existing card). Once approved, you pay off your credit cards with the money. Then, you need to make monthly payments on the new debt until it’s paid off.

In addition to reducing monthly payments and/or speeding debt payoff, refinancing credit card debt with a personal loan or home equity loan can quickly boost your credit score. This is because with your cards paid off, your credit utilization (also called “amounts owed”) could drop significantly — and credit utilization contributes to 30% of your score.

Since personal loans have lower interest rates than credit cards, on average, and don’t require home equity, they’re often a good way to consolidate credit card debt. Plus, some personal loans can be funded as soon as the same day you apply.

Pros and cons of credit card refinancing

There are many good reasons to use a personal loan to pay off your credit cards, but there can be downsides too.

Pros

You could save on interest: For borrowers with decent credit, personal loans tend to have lower interest rates than credit cards. According to Federal Reserve data, as of August 2023, credit cards charged an average 21.19% interest rate, while a 24-month personal loan had an average rate of 12.17%.

You could improve your credit score: Thirty percent of your credit score is calculated by determining how much you owe, and 10% is determined by your credit mix, according to FICO.

• When it comes to how much you owe, credit scores hinge, in part, on what percentage of your available credit you’ve used. Then there’s the credit mix component. Having a good mix of debt is actually a good thing in the eyes of credit-scoring companies.
• However, it doesn’t mean that opening a lot of new credit lines will be good for your credit score — that’s likely to have the opposite effect. But if you only have credit cards, adding an installment account to your existing revolving accounts could have a positive effect on your score.

You can enjoy simpler payment plans: If you’re carrying multiple credit card balances, you might enjoy the ease of making just one payment to one lender. And since most credit cards will calculate your payment based on your current balance, your payment amount might differ from month to month as your balance goes up or down. On the other hand, a personal loan features a set payment plan and a predetermined date when you’ll be free from debt. You may like the structure that adds to your debt repayment.

Cons

Interest rates aren’t always lower: While personal loans have lower interest rates than credit cards on average, that’s not true in every case. It’s wise to prequalify for rates with various lenders so you can determine whether borrowing a personal loan would save you money.

Personal loans often come with fees: While you might be able to qualify for a personal loan with no fee, many lenders attach an origination fee to their loans. This amount is usually taken out of your principal borrowing amount.

• Say you have $10,000 in credit card debt and you take out a $10,000 personal loan with a 5% origination fee. When the lender disburses the funds, you’ll receive $9,500 instead of $10,000.

Personal loans can lead to more debt: If you have a significant amount of credit card debt, you’ll want to make sure that you don’t get yourself back into this situation again. If you use a personal loan to pay off your credit card but don’t change your credit card usage, you could end up with two piles of debt instead of one.

4 personal loan companies for paying off credit card debt

Here are some of the strongest candidates for consolidating your credit card debt.

SoFi: Best overall

Upgrade: Best for fair credit

Discover: Best for no origination fees (and low rates)

Happy Money: Best for consolidating credit card debt

Other ways to pay off credit card debt

If a personal loan doesn’t sound like the best choice, take a look at the following alternatives.

1. Balance transfer cards

If you can qualify for a credit card with a 0% promotional interest rate for balance transfers, you may be able to transfer your existing high-interest credit card balance to that card and save money.

However, remember two key points:

• Be sure that you can pay off the balance before the 0% introductory rate period ends.
• Most cards charge a fee for a balance transfer, so factor that surcharge into the cost or savings of this strategy.

2. Debt snowball, avalanche methods

If you have balances on multiple credit cards, these strategies might help you out.

Debt snowball method: Put any extra money you have toward your lowest outstanding balance. So, if you have one credit card with a $1,000 balance and one credit card with a $2,000 balance, make the minimum payment on the $2,000 balance and pump all the money you can toward the $1,000 balance. Once you pay off the $1,000 balance, you can now start putting that extra money toward the other card.

Debt avalanche method: Put any extra money you have toward the debt with the highest interest rate. Let’s say you still have the credit card balances from the above example, but the $2,000 balance has a 34.99% APR, while the $1,000 balance has a 19.00% APR. Using the avalanche method, you would make the minimum payment on the $1,000 balance and put as much as possible toward the $2,000 balance with the higher interest rate.

The avalanche method will save you money on interest, but the snowball strategy can help you feel motivated and gain momentum in your quest to pay off credit card debt. Decide which resonates with you and motivates you the most toward a faster payoff.

3. Up your earning power

It might sound obvious, but making more money is one of the best ways to pay off your credit card debt faster. While finding a higher-paying job is ideal, earning more money with a second job might be an easier-to-achieve solution in the short term.

Consider freelance work, part-time work, or a job in the gig economy. Whichever you choose, factor taxes, maintenance or supply costs, and other expenses into your budget, as many second jobs can carry these kinds of costs.

Making an extra $100 every week or every month can help you pay off your credit card debt that much faster. If you decide to go this route, make sure you’re taking all the money from that side gig, subtracting taxes and expenses (if it’s not done automatically), and making extra payments toward your debt.

4. Use a home equity loan

If you own a home with sufficient equity, you may be able to tap that equity to pay off credit cards. Much like using a personal loan, you would use the proceeds to pay off your credit cards, then make payments on the home equity loan instead. While you may be able to secure a lower rate with a home equity loan, your house could be foreclosed if you miss payments. Home equity loans can also take a month or more to get approved.

How to get a personal loan

Here are some steps that almost all personal loan applications have in common.

1. Check your credit: This isn’t a part of the actual application process, but it’s one of the first things lenders will do once they get your application. Credit scores are a large part of whether you qualify for a loan at all, what interest rate you’re offered, and what fees you’re charged. You can get free credit reports from the three credit bureaus at AnnualCreditReport.com. If you see any errors weighing down your score, report them to the appropriate credit bureau (Experian, Equifax, or TransUnion).
2. Do your research: Before you make any moves, compare lenders carefully. You can usually prequalify for a personal loan with a soft credit check that won’t impact your credit score. Do this with several companies and compare the interest rates, origination fees, loan terms, and other information before you make a choice. Keep in mind that prequalification is not an offer of credit, and your final rate could be higher.
3. Select the best option: When you’re choosing the best option, interest rates and fees aren’t the only thing to consider. The loan term is also important — a longer term generally means lower payments but a higher amount of total interest paid, while a shorter loan term means the reverse. Make sure that you fully understand any extra costs that might impact you, such as late fees or prepayment fees. And do the math to ensure you can cover the monthly payments without struggling.
4. Apply: The formal application will likely require proof of identity, proof of address, proof of employment and income, and your Social Security number.
5. Pay off your credit card: Once you’re approved and sign the final paperwork, your loan funds will be disbursed, likely via direct deposit into your bank account. You’ll then use the funds to pay off your credit card and start making monthly payments to your personal loan company. Make sure to add the new due date and payment amount to your monthly budget.

Learn More: How to Get a Personal Loan

FAQ

Should you refinance credit cards?

Yes. If you can qualify for a loan with a lower interest rate than your credit card and avoid fees — and you’re confident you can resist the temptation to run up another big credit card bill. A good credit score is a big factor in getting low interest rates and fees, so if your FICO score is 670 or higher, you are likely in a better position to consolidate your credit card debt with a personal loan or other loan.

How do I consolidate my credit cards?

You can use another debt instrument, like a personal loan, home equity loan, or credit card balance transfer, to consolidate your credit card balances into one account with one payment. Look for a loan with a lower interest rate than what you currently owe on your cards, and make a point to not run up the balances on your cards once you pay them off with the new loan.