{"id":20724,"date":"2024-09-09T08:30:00","date_gmt":"2024-09-09T14:30:00","guid":{"rendered":"https:\/\/www.lexingtonlaw.com\/blog\/?p=20724"},"modified":"2025-06-04T16:58:18","modified_gmt":"2025-06-04T22:58:18","slug":"loan-pay-off-credit-cards","status":"publish","type":"post","link":"https:\/\/www.lexingtonlaw.com\/blog\/credit-101\/loan-pay-off-credit-cards.html","title":{"rendered":"Should I take out a personal loan to pay off credit card debt?\u00a0"},"content":{"rendered":"\n
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The information provided on this website does not, and is not intended to, act as legal, financial or credit advice.<\/em>See Lexington Law\u2019s editorial disclosure for more information.<\/em><\/a><\/p>\n\n\n\n

Taking out a personal loan can help you get a lower interest rate and consolidate your credit debt. But a personal loan may also come with new fees and payment terms, so make sure to consider your collective monthly payment before moving forward.<\/p>\n\n\n\n

Credit card debt can be difficult to keep track of. From juggling due dates to dealing with high interest rates, managing credit card debt can be time consuming.\u00a0<\/p>\n\n\n\n

To simplify your finances, you might consider taking out a personal loan<\/a> to pay off credit card debt. After using the money from the loan to pay off your credit cards, you can then make payments toward the loan. <\/p>\n\n\n\n

Unsure if this is the right option for you? In this article, we\u2019ll weigh the benefits and drawbacks of using a personal loan to pay off credit card debt. We\u2019ll also discuss alternative debt consolidation<\/a> options to consider. <\/p>\n\n\n\n

Benefits of taking out a personal loan to pay off credit card debt<\/strong><\/h2>\n\n\n\n

In the U.S., credit card debt<\/a> is on the rise, with the average balance at $5,910 per person (at the time of writing this article). If you\u2019re struggling to make a dent in your balances, you might consider debt consolidation as a step forward. Below are the benefits of taking out a personal loan to pay off credit card debt: <\/p>\n\n\n\n

1. Less interest <\/strong><\/h3>\n\n\n\n

Generally, personal loans have lower interest rates than credit cards. According to the Federal Reserve<\/a>, the average credit card interest rate is 22.16 percent,<\/strong> while the average 24-month personal loan interest rate is 11.48 percent<\/strong> (based on data from May 2023). Therefore, opting for a personal loan could potentially cut your interest rate in half. With less interest, you can put more money toward the principal balance and pay your debt off faster. <\/p>\n\n\n\n

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2. Fewer payments <\/strong><\/h3>\n\n\n\n

If you use a variety of credit cards, then you have to pay multiple balances each month. A personal loan, on the other hand, involves only one monthly payment. Consolidating your payments into one can make paying debt easier to manage and reduce the possibility of missing a payment. <\/p>\n\n\n\n

3.<\/strong> <\/strong>Better credit score <\/strong><\/h3>\n\n\n\n

Although applying for a personal loan will trigger a hard inquiry that may temporarily cause your credit score to drop a few points, it can help improve your credit score in many ways. <\/p>\n\n\n\n

First, taking out a personal loan can improve your credit mix, or your variety of credit types. If you\u2019ve historically only opened credit card accounts, then a personal loan can add a different type of credit account to your credit mix and, therefore, improve your credit score. <\/p>\n\n\n\n

Next, using a personal loan to pay off credit cards lowers your credit utilization ratio<\/a>\u2014the amount of credit you\u2019re using divided by your total credit limit. <\/p>\n\n\n\n

To lower your credit utilization even more, remember to leave your credit accounts open even after paying them off. Leaving old accounts open also keeps your length of credit history long, which is another factor that affects your credit score<\/a>. <\/p>\n\n\n\n

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Drawbacks of taking out a personal loan to pay off credit card debt<\/strong><\/h2>\n\n\n\n

While using a personal loan to pay off credit card debt has many benefits, there are also some drawbacks to consider. <\/p>\n\n\n\n

1. Fees<\/strong><\/h3>\n\n\n\n

Many lenders charge an origination fee to process your loan, generally between 0.5 and one percent of the loan amount. Other fees include application fees, late payment fees, returned check fees and prepayment penalties. Depending on how much lower your loan interest rate than your credit cards, these fees can cut out a portion of your savings. <\/p>\n\n\n\n

2. Lowest interest rate isn\u2019t guaranteed<\/strong><\/h3>\n\n\n\n

While personal loans typically have lower interest rates than credit cards, you may not qualify for a favorable APR if you have a bad credit score<\/a>. Those with very poor credit may not qualify for a personal loan at all. <\/p>\n\n\n\n

3. Potential to get deeper into debt <\/strong><\/h3>\n\n\n\n

Taking out a personal loan can perpetuate the debt cycle. Therefore, you shouldn\u2019t rack up new credit card debt while you\u2019re paying off your personal loan. If you continue to use credit cards, you could find yourself in even more debt than you started with. <\/p>\n\n\n\n

How to get a loan to pay off credit card debt <\/strong><\/h2>\n\n\n\n

If, after weighing the pros and cons, you\u2019ve decided that getting a loan to pay off your debt is the right option for you, follow these steps: <\/p>\n\n\n\n

Step 1: Review your credit report: <\/strong>Get a copy of your credit report<\/a> and check for errors. Dispute any inaccuracies you find with the credit bureau. <\/p>\n\n\n\n

Step 2: Research lenders and compare loans: <\/strong>Look into banks, credit unions and online lenders. Apply for prequalification and record the loan terms you\u2019re likely to get approved for. <\/p>\n\n\n\n

Step 3: Choose a lender and complete your application. <\/strong>Once you\u2019ve found the best offer, apply for the loan. You may need to submit additional documentation to complete the application process, such as copies of your ID, bank statements and pay stubs. <\/p>\n\n\n\n

Step 4:<\/strong> Receive the funds and pay off your credit card debt: <\/strong>Once you\u2019re approved, the lender will send you the funds that you can use to pay off your credit card debt. Some debt consolidation lenders may even pay your creditors directly, removing the hassle from your end. <\/p>\n\n\n\n

Step 5: Make payments toward your loan. <\/strong>Pay down your personal loan each month. Create reminders or set up auto pay to avoid missing payments. <\/p>\n\n\n\n

Alternative ways to consolidate credit card debt<\/strong><\/h2>\n\n\n\n

If you\u2019ve decided that taking out a personal loan isn\u2019t the right option for your financial situation, consider other ways to pay off your credit card debt: <\/p>\n\n\n\n