Using a Personal Loan to Pay Off Credit Card Debt: Is It Worth It?

How Using a Personal Loan to Pay Off Credit Card Debt Works

Using a personal loan to pay off credit card debt is a form of debt consolidation. You borrow a lump sum at a fixed interest rate, use it to pay off one or more credit cards, then repay the personal loan in fixed monthly installments over 2–7 years. The strategy makes financial sense when the personal loan rate is meaningfully lower than your credit card APR.

Example: You have $18,000 spread across three credit cards at average 23% APR. You qualify for a $18,000 personal loan at 10% APR over 4 years. Your monthly payment drops from approximately $540 to $456, and you pay $3,900 in interest instead of roughly $12,000. That's over $8,000 saved—and a fixed payoff date.

When a Personal Loan Makes Sense

The strategy works well when these conditions are met:

• The rate is meaningfully lower: Look for at least a 3–5 percentage point reduction. Dropping from 22% to 11% is compelling. From 22% to 19% is barely worth the effort.
• Your credit score qualifies you: Personal loan rates of 8–14% typically require a credit score of 670–750+. Scores below 600 often result in rates above 20%, which may not beat your credit card rates.
• You can commit to not using the cards again: The most common mistake is paying off credit cards with a personal loan, then running the cards back up. You'd then have both the loan and new card debt.
• The loan term doesn't extend your payoff significantly: A 7-year loan on a balance you could pay off in 3 years costs you 4 extra years of interest, even at a lower rate.

How to Find the Best Personal Loan Rate

Rates vary significantly between lenders. To find the best rate:

1. Pre-qualify with multiple lenders using a soft credit check. Most online lenders (LightStream, SoFi, Marcus by Goldman Sachs, Discover Personal Loans) allow pre-qualification without impacting your credit score. Compare 4–6 offers.
2. Check your credit union first. Credit unions typically offer personal loan rates 1–3% lower than traditional banks for members, especially for debt consolidation.
3. Look at online lenders: LightStream consistently offers some of the lowest rates (6–12%) for borrowers with excellent credit. SoFi and Marcus offer competitive rates with no origination fees.
4. Watch out for origination fees: Some lenders charge 1–8% of the loan amount upfront. A $20,000 loan with an 8% fee means you only receive $18,400, but you owe $20,000. Factor fees into your comparison.

The Impact on Your Credit Score

Using a personal loan to pay off credit card debt has a complex but generally positive effect on credit:

• Short-term: small dip from the hard inquiry (typically 5–10 points)
• Positive: credit utilization drops — if you pay off $15,000 in card balances, your utilization ratio falls dramatically, which can raise your score by 20–50 points
• Negative: new account lowers average age of accounts slightly
• Long-term: positive if you make all payments on time and don't accumulate new card debt

For most borrowers, credit scores increase within 3–6 months of consolidating credit card debt into a personal loan, primarily due to reduced utilization.

Risks and What to Watch Out For

The personal loan strategy isn't risk-free:

• Re-accumulating card debt: This is the biggest risk. After paying off cards, many people feel relief and gradually charge them up again. Consider cutting up or freezing paid-off cards.
• Variable vs. fixed rate: Most personal loans are fixed rate—an advantage. Lock in the rate knowing your payment won't change.
• Secured vs. unsecured: Standard personal loans are unsecured (no collateral), which means slightly higher rates but no risk of losing assets. Never use a secured personal loan (backed by a car or other asset) to pay off credit card debt unless absolutely necessary.
• Prepayment penalties: Some lenders charge fees if you pay off the loan early. Choose lenders with no prepayment penalties so you can pay extra without cost.