Personal Loan to Pay Off Credit Cards: When It Helps and When It Doesn't

Using a personal loan to pay off credit cards swaps several revolving balances for one fixed loan with a set monthly payment and a set end date. It can lower your total interest when the loan's rate, after fees, is clearly below what your cards charge. It doesn't make the debt any smaller, and it can backfire if the cards fill back up.

How a personal loan for credit card debt works

The idea is simple. You borrow one lump sum and use it to pay your card balances down to zero, then you repay the loan in equal monthly payments over a fixed term, often a few years. Some lenders pay the card companies directly. Others deposit the money with you, and you make the card payments yourself.

• Fixed payment: the amount stays the same every month, which makes budgeting easier than with card minimums that move around.
• Fixed end date: if you make every payment, the loan is paid off on a known date. Card minimums have no real end date, as I explain in why minimum payments take so long.
• Interest works differently: card interest is charged on a balance that can keep growing. A personal loan follows a fixed schedule, so more of each payment goes to principal as the months pass.

This is one form of consolidation. For the bigger picture on card balances, interest and payoff methods, see our credit card debt guide hub.

What decides whether it saves you money

A personal loan to consolidate credit card debt only comes out ahead when the full cost of the loan is lower than the full cost of keeping the cards. A few things decide that:

1. The loan's rate compared with your card rates. The gap has to be big enough to matter. A loan rate barely below your card rate may save very little.
2. Fees. Some loans charge an origination fee, often taken out of the money you receive. That raises your real cost, and it can mean you need to borrow more to clear the same balances.
3. The term. A longer term lowers the monthly payment but can raise the total interest. A lower payment is not the same as a cheaper loan.
4. Your credit profile. The rate you're offered depends on your credit history and income. Lower rates usually go to stronger profiles, so the number you see advertised may not be the number you get.
5. What happens to the cards afterward. If new charges build up on the cleared cards, you end up with the loan payment plus new card debt.

A worked example with simple numbers

Example: Say you owe $10,000 across your cards at 24% APR, and you can put $332 a month toward the debt. You're comparing that with a 3 year personal loan at 12% APR.

• Cards, first month's interest: $10,000 × 24% ÷ 12 = $200. Only $132 of your $332 payment goes to the balance.
• Loan, first month's interest: $10,000 × 12% ÷ 12 = $100. So $232 of the same payment goes to the balance.
• Loan total: a 36 month loan of $10,000 at 12% has a payment of about $332. $332 × 36 = about $11,960, so roughly $1,960 in interest.
• Cards at the same $332 a month: payoff takes about 47 months, with roughly $5,500 in interest.
• Add a fee: if the loan carried a $500 origination fee paid separately, its combined interest and fee cost would be about $1,960 + $500 = $2,460. If the lender instead deducts the fee from the proceeds, a $10,000 loan would provide only $9,500 toward the cards; you would need another $500 or a larger loan, changing the payment and total interest.

These are made up numbers for illustration only. To run your own, plug your balances and a loan offer into our debt consolidation calculator, and compare it with the credit card payoff calculator to see what happens if you keep the cards and pay them faster.

The risks and trade-offs to weigh

• Running the cards back up. This is the big one. Clearing the cards frees up credit, and spending it again leaves you in a deeper hole than before.
• Stretching the term too far. A long term can make the loan cost more in total than paying the cards aggressively would have.
• Fees that erase the savings. Always compare total cost, not just the rate.
• Effects on your credit. Applying usually involves a credit check, and a new account shows up on your report. Paying cards down can lower your credit utilization. To the best of our knowledge the overall effect depends on your whole profile, so no one can promise which way your score will move.
• Fixed payments don't flex. Unlike a card minimum, the loan payment doesn't drop in a tight month.

A balance transfer is the other common way to cut card interest, and it has its own trade-offs around promo periods and transfer fees. I compare the two side by side in balance transfer versus personal loan.

Tools for tracking the plan

Whichever route you weigh, it helps to see every balance, rate and payment in one place. The site's calculators listed above cost nothing, and they're the place to start for a quick comparison.

If you want something that keeps your whole plan in one spot, the site also has the Clearora™ Debt Payoff Dashboard. It's an online dashboard with tabs for credit cards, balance transfers, car loans, personal loans and mortgages, plus a save and load feature so you can come back to your numbers. It comes with a manual, a video and a private Skool community called Get Out of Debt Club. You can read what's included on the Clearora dashboard details page. It's a tool for laying out your numbers. It doesn't change your rates or decide anything for you.

FAQ

Is a personal loan to pay off credit card debt a good idea?

It depends on the numbers and on your habits. It tends to help when the loan's rate after fees is well below your card rates and the cleared cards stay mostly unused. It tends to hurt when the term is very long, the fees are high, or new card balances build up.

Will a consolidation loan hurt my credit score?

Applying usually means a credit check, and the new account appears on your report. Paying cards down can lower your utilization. To the best of our knowledge the net effect varies from person to person. The CFPB has plain language guides on credit reports and scores.

Should I close my credit cards after paying them off with a loan?

I can't tell you what to do with your accounts, but I can lay out the trade-off. Closing a card can raise your utilization and may shorten your average account age. Keeping it open leaves room to spend again. Some people keep the cards open but put them away.

What if I can't qualify for a lower rate?

If the rate you're offered isn't clearly lower than your cards, a loan may not save anything. Other routes include paying the cards down with the avalanche or snowball method, or asking your card company for a lower rate. Our calculators let you compare these options side by side.

More on this topic: Debt Consolidation: How It Works, Your Options and When It Helps