A complete guide to using a personal loan to pay off credit card debt

You’re not alone if you struggle with paying off high-interest credit card balances. Finding effective ways to manage debt can be challenging, especially if you’re juggling multiple cards with varying balances and payment due dates. A personal loan can offer a handy way to simplify your payments and reduce costs by consolidating your debts into a single obligation at a lower interest rate.

Let’s take a closer look at credit cards vs. personal loans, how to use a personal loan to pay off your credit card debt, and whether this financing option is right for you.

Personal loans vs. credit cards

As a borrower, taking out a personal loan provides you with a large sum of cash that you can use for a variety of purposes. A credit card, on the other hand, gives you a revolving line of credit that you can tap into numerous times, rather than a lump sum that you receive all at once. Funds become available to use again as you make payments. 

Both personal loans and credit cards require repayment on a monthly basis. A personal loan typically requires you to pay a fixed amount of money to your lender. A credit card’s minimum payment generally depends on how much money you spent that billing cycle.

In general, credit cards come with higher interest rates compared to personal loans. In fact, the annual percentage rate (APR) on a credit card could be 30% or higher. You can typically obtain a lower interest rate (and the lower monthly charges that come with it) by securing a personal loan, especially if you have good or excellent credit.

Are personal loans good for paying off credit card debt?

A personal loan can be a great option for consolidating your credit card debts if you’re approved for a lower interest rate. You’ll save money over time and pay less in total interest. You’ll also be responsible for only one monthly payment, which is easier to manage than multiple payments to different lenders.

At the same time, a personal loan isn’t the right solution for everyone. Before applying, make sure that your credit score is high enough to qualify for a good interest rate. You should also ensure you can afford the monthly payment on the personal loan and avoid falling behind on your debt payments.

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

Using a personal loan to pay off credit cards is a debt consolidation method. Let’s take a closer look at how this process works.

1. Apply for a personal loan

Prior to applying for a personal loan, it’s important to shop around. Getting prequalified with multiple lenders allows you to see personalized interest rates and terms for your financial situation. Certain lenders may offer better conditions than others, so taking the time to consider different options can help you find the best deal. Once you’ve decided on a lender, you can submit a full application to determine your loan eligibility.

As for how long it can take for you to receive the funds, the good news is that financing for personal loans tends to come through faster than with most borrowing options. Approval and delivery of personal loan funding typically occur within 1 – 7 business days. Some lenders even offer same-day financing.

2. Pay off your credit cards

Once the money arrives in your account, it’s yours to spend on paying off outstanding credit card balances. With Rocket Loans^SM, you can apply to borrow amounts from $2,000 to $45,000. Select lenders offer loans as high as $100,000 under certain circumstances. You’ll divvy up the funds across all your credit card balances until they’ve been repaid in full – and when you’re done, you can take a moment to pat yourself on the back and enjoy being debt-free from your credit cards.

3. Repay the personal loan

Next, it’s time to focus on repaying the personal loan. Luckily, you’ve likely chosen the lender that offered the best repayment terms for your financial situation. You also now have just one loan to manage, making it easier to stay on track and keep up with your payments. 

If your budget allows, you may even wish to consider paying off the personal loan early to save even more on interest charges.

4. Limit your credit card usage 

Using credit cards responsibly can be a great way to build your credit, but balances tend to accrue quickly. While you don’t need to give up your credit cards entirely, you’ll want to keep a tighter watch on how often you’re using your cards and any expenses you accumulate to avoid falling back into credit card debt.

Pros and cons of using a personal loan for credit card debt 

Here are the advantages and disadvantages of using a personal loan to aid with debt consolidation.

Pros:

• You could secure a lower interest rate on your debts.
• You’ll have only one monthly payment.
• You can pay off some or all of your credit card debt.
• You could wind up boosting your credit score.

Cons:

• If your credit score is low, you might not receive a good interest rate on your personal loan.
• You could potentially end up with a higher monthly payment than you had with credit cards.
• If you default on a personal loan, the incident can remain on your credit report (and affect your ability to borrow money) for up to 10 years.
• You may have to pay origination fees to get a personal loan.
• If you close a credit card account once you pay it off, your credit score could temporarily drop.

When should you take out a personal loan to pay off your credit cards?

A personal loan won’t be right for every borrower. It’s important to consider your personal financial situation by asking yourself the following questions:

• Do I have a good or excellent FICO^® Score?
• Is my debt-to-income ratio (DTI) reasonably low?
• Have I been able to comfortably afford my monthly payments?

If you answered “no” to any or all of the above questions, now might not be the right time to apply for a personal loan. That doesn’t mean the right time won’t eventually come along, though. You can always reconsider after you’ve taken steps to improve your credit or figure out a new budgeting plan.

Alternatives to taking out a personal loan

A personal loan isn’t the only option that can help you get yourself out of credit card debt. Let’s take a look at alternative paths to consider.

Use a home equity loan or HELOC

Similar to getting a personal loan, taking out a home equity loan means you’ll receive a lump sum of money that you can use for various purposes – including paying off your outstanding credit card debt. The difference is that a home equity loan isn’t extended on an unsecured basis. Since you’re borrowing against the equity in your home, the property is put up as collateral to secure the loan.

Another option could be taking out a home equity line of credit (HELOC), which also allows you to borrow against your equity but in the form of revolving debt. As with a home equity loan, your residence is used as collateral to secure the funds, and you risk potentially losing the property if you can’t make your monthly payments on time. 

Apply for a balance transfer credit card

With a balance transfer credit card, you can take the balances on all your credit cards and move them to a single new card. You can then pay off this credit card on a month-to-month basis.

Some credit card companies offer a 0% APR introductory period, typically lasting 12 – 18 months. If you’re able to repay your entire balance within this time frame, you stand to save a lot in interest. But if you can’t, you’ll have to pay your new card’s APR, which will likely be extremely high. 

You may also be required to pay a balance transfer fee of 3% – 5% of the transferred amount, in addition to any annual fees.

Make higher credit card payments

If you don’t want to take out a new loan or line of credit, you could consider paying extra every month. Your monthly statement will note your current total balance and request a minimum payment. If you’re able to put aside more than the minimum, you’ll pay your balance down faster. That said, you’ll only want to make additional payments if you’re certain that you can afford them. 

Create a repayment plan

If you have multiple credit cards with different outstanding balances, you can use a variety of financing strategies to pay them off.

For instance, you might try the debt avalanche method, which first steers payments towards cards with the highest interest rates. This strategy could save you a lot in interest down the line.

Alternatively, you might use the debt snowball method, where you pay off the cards with the smallest balances first. This can be a rewarding method that offers results as soon as your smaller debts start disappearing. If your cards with the lowest balances also have the highest interest rates, that’s even better.

Sign up for credit counseling

If you want guidance as you work to pay off your credit cards, you could find a credit counselor who can help you design a debt repayment plan or monthly budget. Credit counseling services are often available through nonprofit organizations, financial institutions, and government agencies. Before committing to a counselor, make sure to verify that they are licensed and experienced in helping people get out of credit card debt. 

Another option is taking an in-person or online debt management class to learn about various repayment strategies.

Try debt settlement

You can try negotiating a debt settlement with your creditors or using a debt settlement company to help you do it. If you’re successful, your credit card issuer might be willing to forgive a portion of the debt you owe.

That said, you’ll need to negotiate individually with each provider if you have multiple credit cards, and not all of them may agree to erase any or all of your debt. Working with a debt settlement company may be expensive, too, as you can expect to pay 15% – 20% of your total debt in trying to settle it.

The bottom line

Using a personal loan to pay off your credit card debt may feel like you’re just trading one form of debt for another. But if you take the time to evaluate your financial situation, consider your options, and make the choice with all this information in mind, you may find that you’ll save a considerable amount of money in the long run. Even consolidating your monthly debt obligations into a single payment can help a lot when it comes to getting more organized and in control of your debts.

Interested in using a personal loan to consolidate credit card debt? Apply online today with Rocket Loans℠ if you’re curious about the rates and terms you could prequalify for.