Personal Loans

Using a Personal Loan to Pay Off Credit Cards

Personal Loan to Pay Off Credit Cards

If you’re stuck in a cycle of credit card debt, you’re probably looking for a way out. Unfortunately, many of the “solutions” to credit card debt come with their own share of pitfalls to be aware of.

Maybe you tried paying extra toward your balances but struggled to make progress because you keep using your card for purchases. Or, perhaps you looked into balance transfer credit cards but worry about paying fees.

Either way, struggling with credit card debt is pretty normal these days. A recent report from Lending Tree-owned MagnifyMoney even showed that, as of late 2017, the average household with credit card debt had $8,158 in balances. Meanwhile, the average credit card debt per individual worked out to $4,205.

With these average debt figures in mind, it’s no wonder there are so many financial products aimed at helping people dig their way out. But, which solution is best for your needs? We’ll provide the information then let you decide.

Table of Contents:

Personal loans and debt consolidation
How to get your best rate on a personal loan
Improve your credit
Keep a job and sufficient income
Personal loans vs. balance transfer cards
Pros and cons of balance transfer cards
Pros and cons of personal loans
Other options for paying off credit cards
Final thoughts

Personal loans and debt consolidation

One financial product that may be helpful for someone trying to pay off debt is the personal loan. While personal loans do entail borrowing more money, the way they are set up makes them a smart option for people who want to pay down debt.

With an unsecured personal loan, you can qualify for a fixed term, a fixed monthly payment and a fixed interest rate without putting down collateral. Generally speaking, you can borrow up to $35,000 (occasionally more with some lenders) and pay it back over 24 to 84 months. Your interest rate can vary, but could be as low as 3.49% or over 30% depending on your creditworthiness.

To qualify for a personal loan with your best interest rate and loan terms, you usually need good or excellent credit (a FICO score of at least 740), a low debt-to-income ratio and proof of ability to repay. If your credit score is low or you can’t qualify for a personal loan on your own for any reason, you may also need a cosigner who agrees to become jointly responsible for repayment of your loan.

If you’re wondering how borrowing more money with a personal loan could help you out of debt, keep in mind that the key to this option is how you use it. By using a personal loan for debt consolidation, you can pay off your credit cards and simplify the debt repayment process.

Instead of paying multiple credit cards each month, you could make a single payment to your personal loan – likely at a lower interest rate since the average credit card APR is 15%.

Other than the fact you may qualify for a lower interest rate and fixed repayment terms, personal loans come with another benefit – the fact they are easy to find. You can apply for a personal loan with a brick-and-mortar bank or credit union, a peer-to-peer lender or an online lender that will let you compare multiple quotes from the comfort of your home.

How to get your best rate on a personal loan

To get the most bang for your buck with a personal loan, you’ll want to make sure you get your best interest rate possible. But, how can you make sure you’re getting your best rate? Well, this part can be tricky.

Improve your credit

According to, the loans with the best interest rates and terms tend to go to those with “very good” or “excellent” credit – or those with FICO scores 740 and above. Keep in mind that your credit score is determined using five main factors: payment history, amounts owed, credit mix, length of credit history and new credit.

The main factor that impacts your FICO score is your payment history (35%), or the rate at which you make all of your monthly payments on time. Making up another 30% of your FICO score is your amounts owed or “credit utilization.” This figure is determined by dividing your credit limits by your credit balances. For example, someone who owed $3,000 on credit cards with a total limit of $10,000 would have a utilization rate of 30%.

Your credit mix, which makes up 10% of your FICO score, is determined based on the types of credit you have (hint: having more than one type of loan or credit is a good thing). The length of your credit history makes up 15% of your score and is self-explanatory (how long have you had each line of credit open, on average?), and new credit (how much new credit you have) makes up 10% of your score.

With these details in mind, it’s not that hard to imagine how you might boost your credit score if it’s currently low. Some steps that can help improve your credit score include:

  • Make on-time bill payment a priority. Since your payment history is the biggest determinant of your FICO score, you’ll want to make sure you’re paying all of your bills on time.
  • Pay down debt if you can. The lower your credit utilization, the better you’ll score in this category. Paying down debt will help lower your utilization. However, taking out a personal loan may also lower your utilization since you’ll have more open credit – provided you don’t cancel your credit cards after you pay them off.
  • Keep old cards open. Keep your old credit cards and other accounts open to increase the length of your credit history – even if you’re not using them.
  • Improve your credit mix. Taking out a personal loan to consolidate debt could improve your credit mix by adding an installment loan to your credit profile. However, you should not take out a loan for the sole purpose of boosting your credit score.
  • Limit new credit. Only open new accounts when it’s absolutely necessary.

Keep a job and sufficient income

In addition to your credit score, lenders look at factors like your employment history and debt-to-income ratio when qualifying you for a loan. Ideally, you’ll need a debt-to-income ratio of less than 36% to qualify for a personal loan with your best rate and terms. In case you’re not aware of this term, your debt-to-income ratio is the amount of all your monthly debt payments divided by your gross monthly income. For example, if you earn $4,000 per month and your monthly debt obligations add up to $2,000, your debt-to-income ratio would be 50%.

Your employment history is also important because, well, you need to have an established source of income in order to repay your personal loan. If you can’t show your lender a proven source of income, you may not qualify for a personal loan even if you have a good credit score.

Personal loans vs. balance transfer cards for debt consolidation

Use the details in the following table to make an informed decision between a personal loan and a balance transfer card:

Personal Loans vs. Balance Transfer Cards for Debt Consolidation
Personal Loan Balance Transfer Credit Card
Ease of application Like a regular card, you can usually apply online and get approved within minutes unless the lender requires additional information. You can also apply online and loans can be issued within a day if approved.
APR As low as 3.49% depending on your creditworthiness. Many offer a 0% intro APR for certain periods of time.
Term Usually 24-84 months. As long as it takes to pay off the debt; but promo APRs last for set terms, typically ranging from 12 to 21 months.
Fees Origination fees that can range from 1%-8% of the loan amount, although many lenders charge no fees upfront. Balance transfer fee equal to 1.5%-4% of your balance, although some cards don’t charge this fee.
What you can consolidate You can use a personal loan to consolidate all types of debt, including credit and medical debt. Credit card debt only — and some banks will not allow you transfer balances to a BT card that is issued by the same bank.
Credit needed Some personal loan companies will approve you with a credit score as low as 580 but you’ll get better rates with better credit. You’ll need good credit to get your best BT offers.
Eligibility requirements You may get approved with a lower score, but your rates will be higher and you’ll also need to prove you have sufficient income to cover the payments. So long as your credit score is strong, that’s all you need to qualify.
Best for
  • People who may have poor credit and can’t qualify for a good BT offer.
  • People who need to borrow more than they can afford to pay off in a limited BT intro offer period and want the security of knowing they’ll have fixed monthly payments.
  • People who are trying to consolidate several types of debt, not just credit debt.
  • People with good credit who are sure they can pay off their debt within the 0% intro APR period.
  • People who do not plan to make any new purchases on the card.
  • People who only have credit card debt to consolidate.

While personal loans can be ideal for debt consolidation, another option to consider is balance transfer credit cards. These credit cards offer 0% intro APR for 12 to 21 months and make it easy for you to transfer credit card balances at high interest rates.

Here are some of the most important facts to understand about balance transfer cards:

  • The introductory APR only lasts a limited time. Once the 0% intro APR offer ends, your credit card’s interest rate will reset, and this can increase your monthly payment amount.
  • Deferred interest is a risk. If you’re more than 60 days late with your monthly payment, your card issuer can boost your interest rate on all balances – even balances that were supposed to be at 0% APR.
  • You may have to pay a balance transfer fee. While some balance transfer cards don’t charge this fee, those that do typically charge fees equal to 1.5%-4% of your balance or $5, whichever is greater.
  • Intro APR may not apply to new purchases. Racking up new charges on a balance transfer credit card can be dangerous. Some cards don’t include purchases in the promo APR deal — only on the amount you transfer. In other words, interest charged on purchases will begin racking up the day you make them.

With these facts in mind, you may be wondering whether it’s better to use a balance transfer card or a personal loan to consolidate your credit card debt. Unfortunately, you’re the only one who can decide which option you prefer.  Here are some pros and cons that can help you make an informed decision:

Pros and cons of balance transfer credit cards:

  • You can get a 0% intro APR interest on your balances for 12 to 21 months, depending on the offer you sign up for.
  • You can apply for a balance transfer card online.
  • Some cards don’t charge a balance transfer fee.
  • Introductory offers don’t last forever, and your card’s APR will reset eventually.
  • If you don’t pay off your debt during your card’s 0% intro APR offer, you could wind up paying a higher interest rate later on. You also lose your grace period if you use a balance transfer card with a balance for purchases.
  • Credit cards and other revolving debts don’t have a set payoff date, which can make it harder to set firm debt payoff goals.

Pros and cons of personal loans:

  • You may be able to get a lower interest rate than you’re currently paying on your credit card debt.
  • You’ll get a fixed interest rate, payment, and loan term meaning you’ll know exactly when you’ll become debt-free.
  • Personal loans are easy to apply for with a bank or online.
  • Personal loans don’t offer 0% APR for a limited time like balance transfer cards.
  • Some personal loans come with fees such as an origination fee.

Other options for paying off credit cards

While personal loans and balance transfer offers are two of the most popular ways to consolidate and pay down debt, there are other financial products that can help you achieve the same goal. Some of your alternatives include:

  • Home equity loans: A home equity loan is similar to a personal loan in that you get a fixed interest rate, a fixed monthly payment and a fixed loan term. The difference is this type of loan is secured by the equity in your home, whereas personal loans are unsecured.
  • Home equity lines of credit: A home equity line of credit also uses the equity in your home as collateral. However, these lines of credit typically come with a variable interest rate and don’t have a set repayment term.
  • 401(k) loans: A 401(k) loan lets you borrow from your own 401(k) retirement account. Typically, the max amount of these loans is limited to 50% of your account balance or $50,000, and your repayment timeline can be up to five years.
  • Savings: If you have money in savings and won’t put yourself in financial peril if you use it to pay down debt, this could be a smart option. By using savings to pay off debt, you can save money on interest and become debt-free without borrowing money.

Final thoughts

If you’re tired of dealing with credit card debt and are ready to do something about it, a personal loan could be the solution you’re looking for. These loans offer a set repayment schedule that can help you stay on track with your debt repayment plan, and their fixed interest rates are often lower than what you’re paying on your credit cards.

On the flip side, a balance transfer offer that comes with 0% intro APR can also help you pay down debt, as can other loan options like home equity loans, lines of credit and 401(k) loans. To make the most of any of these options, you should focus on attacking your debts with fervor and avoiding new debts like the plague.

The bottom line: Many loan options can make debt repayment easier by lowering your interest rate or setting up fixed loan repayment terms. But, if you want to stay out of debt, you have to stop digging.


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