Should You Use A Personal Loan To Pay Off Your Credit Card?
Miranda Crace9-Minute Read
UPDATED: March 07, 2023
Keeping up with your credit card payments is important, but when you’re juggling multiple cards and balances at once, repaying your debt can become a struggle. To ease your mind and maybe save yourself from high-interest charges, you could take out a personal loan that would simplify and consolidate your debt.
Let’s walk through the process of paying off your credit card debt using a personal loan. Then, we’ll consider the benefits and drawbacks of this repayment strategy.
Personal Loan Debt Vs. Credit Card Debt
A personal loan is a large sum of cash that a borrower can use for just about anything within reason. A credit card can function similarly, but instead of a lump sum, it’s a line of credit you can borrow from over and over up to a certain limit or balance. You can repay both on a monthly basis, although a personal loan payment will be a fixed amount, whereas your credit card’s minimum payment will depend on how much you spent that period.
Compared to personal loans, credit cards typically have elevated interest rates – some with a 30% APR or higher. You could get a lower interest rate on a personal loan by having good or excellent credit, and that rate – if it’s a fixed rate – will stay the same until the loan is paid in full.
Is It A Good Idea To Use A Personal Loan For Credit Card Debt?
Personal loans are a great option for consolidating your credit card debt because they typically offer lower interest rates and longer payback periods than credit cards. You’ll also enjoy a single monthly payment instead of having to potentially make multiple payments that go to different credit card companies.
However, a personal loan isn’t the right solution for everyone. Before opting for this strategy, it’s a good idea to confirm that your credit score is high enough for you to qualify for a decent interest rate. It’s also wise to know beyond a shadow of any doubt that you can afford the monthly payment amount and not fall behind on payments.
How To Use A Personal Loan To Pay Off Credit Card Debt
Using a personal loan to pay off credit card debt is part of a process called debt consolidation, whereby a borrower moves their various debts under the umbrella of a single loan, which they then repay in monthly payments.
Next, we’ll take a closer look at the process for consolidating your debt.
1. Apply For A Personal Loan
When you’re thinking of applying for a personal loan, you should first shop different lenders and get prequalified to see the rates and terms you’ll likely qualify for based on your credit history. Some lenders may offer you better interest rates than others, and you’ll want to make sure you pick the one with the best deal. Once you’ve decided, you can then submit a full application.
Approval and delivery of your personal loan can take 1 – 7 business days, so expect to receive your money quicker than you would with most other loans. Some lenders even offer same-day financing, meaning you could see your money on the day you’re approved for the loan. Rocket LoansSM offers this service.*
2. Pay Off Your Credit Cards
You can apply for a loan amount up to $50,000 – or sometimes even as high as $100,000 under special circumstances – and once the money arrives in your account, it’s yours to spend. Divide the funds across all of your credit card balances until they’re at zero. Once that’s done, take a moment to enjoy being debt-free – at least as far as credit cards are concerned.
3. Repay The Personal Loan
We say to enjoy the moment because now comes the part where you repay the loan that you requested and used to liquidate your credit card debt. Don’t be afraid, though. You’ve chosen the lender offering the repayment term that best suits your financial situation, and you just have one monthly payment to keep up with. Again, that’s only one debt repayment you have to worry about now – and it likely has a fixed monthly amount and interest rate.
If you’re financially able, you could even attempt to pay off your personal loan early and save yourself some money in interest.
4. Be More Careful Using Credit Cards
You should avoid using your credit card too much while repaying your personal loan. That doesn’t mean you have to give your card up entirely, though. Credit cards can be a great way to build credit if used responsibly.
Once your loan is fully repaid, start using your card again for purchases you know you can afford. You want to be careful not to fall into the credit card debt you were in before.
Pros And Cons Of Using A Personal Loan For Credit Card Debt
As you can see, paying off your credit card with a personal loan comes with several benefits. But, of course, it can have some drawbacks as well. Let’s review the pros and cons of using a personal loan to remove credit card debt.
- You could get a lower interest rate with a personal loan.
- You can have only one monthly payment to worry about.
- You can pay off some or all of your credit card debt.
- You could end up boosting your credit score.
- Having a low credit score could get you a higher interest rate.
- You could potentially end up with a higher monthly payment than with your card.
- If you default on a personal loan, it can remain on your credit report for up to 10 years.
- You may have to pay origination fees when you’re approved for the personal loan.
- If you close the credit card account after paying off the balance, your credit score could temporarily drop.
When Should You Take Out A Personal Loan To Pay Off Your Credit Cards?
You shouldn’t commit to a new loan blindly. Consider your financial situation first by asking yourself the following questions:
- Do I have a good or excellent FICO® Score?
- Is my debt-to-income ratio (DTI) fairly low?
- Have I been comfortably able to afford my monthly payments?
If you answered “no” to any or all of these questions, now might not be the right time to apply for a personal loan. That doesn’t mean never, though. Take steps to improve your credit or figure out a new month-to-month budgeting plan.
Once you reorganize your finances, you can revisit deciding whether you should get a personal loan.
Alternatives To Taking Out A Personal Loan To Pay Off Credit Cards
A personal loan isn’t the only way to get out of credit card debt. Consider some of your other options below.
Take Out A Debt Consolidation Loan
Personal loans aren’t the only options for debt consolidation. A home equity loan is similar in that you receive a lump sum of money with which you can pay for a large purchase, or in this case, credit card debt.
Unlike most personal loans, however, a home equity loan isn’t unsecured. Since you’re borrowing against the equity of your home, your home is offered up as collateral to secure the loan. This means if you default on the loan, you could lose your home through foreclosure.
Similarly, a home equity line of credit (HELOC) allows you to borrow against your home’s equity as a form of revolving debt, much like a credit card. As with a home equity loan, your home is used as collateral, and you risk losing it if you can’t make your monthly payments.
Apply For A Balance Transfer Credit Card
Getting a balance transfer can consolidate your credit card debt in a way that’s similar to a personal loan. A balance transfer card can allow you to move the collected balances of all your credit cards onto a single new card that you can then pay off month-to-month. Some lenders will offer a 0% APR introductory period, too, and if you can repay your entire balance within this time frame, you could save yourself a lot in interest charges.
This doesn’t mean everything is free, though. You’ll pay a balance transfer fee of 3% – 5% of your transferred amount, and possibly pay annual fees – with interest – after that. Additionally, a typical introductory period can last 12 – 18 months, and if you can’t repay your full balance within that time, you’ll then be paying your new card’s APR.
Make Additional Payments
If you want to tackle your mountain of credit card debt without the help of a loan, you should be prepared to pay a little extra month-to-month.
Your monthly credit card statement will note your current balance and request a minimum payment. If you’re financially able, put a little more toward each monthly payment. This should speed up the process of paying your balance down. Only pay what you can afford, though.
Create A Repayment Plan
If you have multiple credit cards with an outstanding balance, there are a couple of strategies you can consider using to pay them off one-by-one. You can adopt the avalanche method, wherein you target your cards with the highest interest rates first. This method could save you a lot in interest down the line.
On the other hand, the debt snowball method encourages you to focus your extra payments on your cards with the smallest balances first. This can be a rewarding method if you’re in debt, since it can offer faster results by letting you see your smaller debts disappear before your eyes. If your cards with the lowest balances also have the highest interest, all the better!
Again, only make additional payments if you can afford it. Otherwise, you could end up draining your bank account.
Sign Up For Credit Counseling
If you feel like you need additional guidance as you make moves to pay off your credit cards, you might seek financial advice from a credit counselor who can help you design a repayment plan or monthly budget.
Credit counseling services are often available through nonprofit organizations, financial institutions and agencies. Before getting started, just make sure to verify that your counselor is licensed and has experience helping people get out of credit card debt. You can even find in-person or online debt-management classes to learn more about various repayment strategies.
Try Debt Settlement
You can also try talking with your creditors and negotiate a debt settlement, or do so through a debt settlement company. If successful, your credit card issuer might be willing to forgive a portion of the debt you owe. Keep in mind, though: If you have multiple cards, you’ll need to negotiate with each provider, and it’s possible not all of them will agree to forgive your debt.
Working with a debt settlement company can be expensive, too. They charge various fees, and you can expect to pay 15% – 20% of your total debt trying to settle it. A company might also suggest you stop making monthly payments to your creditors while the negotiations take place, which can damage your credit score. This can be especially bad if your providers ultimately refuse the settlement.
Whether you’re considering a personal loan or an alternative option to pay off your credit card debt, you’ll have plenty to think about and weigh. Getting a loan may feel like you’re just trading one debt for another, but carefully examine your situation and decide if you’ll be saving money in the long run. Just simplifying your monthly payments can count for a lot.
If you’re curious about the rates and terms you could qualify for with Rocket Loans, apply online today to prequalify.
*Same day funding is available for clients completing the loan process and signing the Promissory Note by 1:00 PM ET on a business day. Also note, the ACH credit will be submitted to your bank the same business day. This may result in same day funding, but results may vary, and your bank may have rules that limit our ability to credit your account. We are not responsible for delays that may occur due to an incorrect routing number, an incorrect account number or errors of your financial institution.
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