How to pay off credit card debt with a personal loan

A record number of Americans — 111 million — are carrying credit card debt. 

According to the Achieve Center for Consumer Insights, over half (53%) of American consumers are carrying credit card balances to cover the rising cost of essential expenses. 

Other stats are equally depressing: 

• 57% of consumers estimate it would take 6 months or longer to pay off all their short-term unsecured debt, such as credit cards, buy now pay later loans, personal loans and medical debt.
• 46% can’t realistically reduce their credit card spending.
• 35% say it’s “difficult” or “very difficult” to maintain on-time debt payments.

No level of debt is great, but credit card debt is particularly bad. As unsecured debt, credit card debt carries interest rates significantly higher than those on other types of loans. And the items bought with a credit card are usually not appreciating assets, like a house or ownership in a business.

Some people take advantage of balance transfer credit cards to get 0% interest for a limited time, but if you don’t pay off your entire debt before the interest-free period begins, you will be charged an equally high rate.

Though a personal loan doesn’t eliminate debt, it can be a useful tool to clear high-cost credit card debt and replace it with a lower-interest, fixed-rate loan if the market conditions are right and the person wanting to pay off their credit cards is ready to get serious about becoming debt-free.

“If you have credit card and other high-interest debts, [a personal loan] may offer a lower rate, depending on what you can qualify for,” Austin Kilgore, with the Achieve Center for Consumer Insights, tells The Post. “The idea is that if you can qualify for a rate substantially lower than your credit cards, you can use the funds from the personal loan to pay off the high-interest debt and be left with just the personal, or debt consolidation, loan payment that has the lower rate.”

When the math adds up to turn credit card debt into personal loan debt

Your credit card’s annual percentage rate (APR) is set by the credit card issuer and tied to a benchmark, which in the U.S. is the Prime Rate. 

On top of the Prime Rate, the issuer adds their margin, which is both where their profit comes from and a reflection of your risk as a borrower. If your credit rating is fair or poor, you can expect to pay a significantly higher interest rate than if your credit is very good or excellent. 

According to the Federal Reserve, the average credit card interest rate has hovered around 21% for the last few years. If your credit is merely fair or good, your interest rate could be as high as 28%.

Personal loans, on the other hand, have an average interest rate for people with good credit between 12.27% and 14.48%. The difference between those rates can mean the difference between paying thousands over years or paying less in less time. 

In the example below, we compare how long it takes to pay off a $5,000 debt with a credit card versus a personal loan.

The difference in payoff costs stems from how these two financial products structure their repayment terms. Credit card minimum payments are designed to keep you in debt for as long as possible through a compounding minimum payment trap. 

Because your mandatory monthly payment shrinks automatically as your overall balance decreases, you end up contributing very little toward the actual $5,000 principal. Meanwhile, high interest continues to compound relentlessly on the remaining balance, dragging your timeline out for nearly two decades.

By contrast, a personal loan completely bypasses this trap by utilizing a fixed amortization structure. Instead of a fluctuating minimum, you pay a consistent, predictable amount every single month. 

A significant, pre-calculated portion of that monthly payment is aggressively directed straight toward reducing your core principal balance from day one. This structured approach forces the debt down efficiently, guaranteeing that your entire $5,000 obligation reaches zero in approximately 36 months.

When looking for a personal loan to pay off credit card debt, it’s important to shop around for low fees as well as a low interest rate. Personal loans also come with origination fees, which can be between 1% and 8% of the loan value. But even adding that to our calculation, it’s clear that paying off credit card debt with a personal loan can make financial sense.

Getting a personal loan means getting your house in order

The rate you get with a personal loan will depend on your credit score and overall financial profile. The standard classification of credit scores is:

If you are thinking of applying for a personal loan to pay off your credit cards, you may want to either ensure your credit score is in the “good” to “very good” range or have a plan to make it that way.

Your credit score is partly determined by your credit utilization ratio, which is the amount of your available credit you are currently using. For example, if you have a $1,000 credit limit, and you owe $800 on that line of credit, your credit utilization ratio is 80%.

Because “Amounts Owed” makes up a massive 30% of your total FICO Score, scoring models interpret high utilization as a sign of financial distress and elevated default risk. 

An 80% credit utilization ratio generally will have a negative effect on your credit score If you drop to a lower credit tier, (e.g., falling from “good” to “fair”), this could raise the interest rates you will be offered on future loans.

Outside of managing your credit utilization, you can significantly increase your credit score by focusing on the other core components of the FICO and VantageScore models. Payment history is the single largest factor influencing your score. Missing a payment by 30 days or more can significantly damage your credit score, though the impact varies based on your credit history and profile

If you haven’t made a late payment, you can make sure you don’t make one by setting up automatic payments for at least the minimum balance on every account to guarantee you are never marked late. If you accidentally miss a due date, pay it immediately. Late payments are generally not reported to credit bureaus until they are a full 30 days past due.

If you have made a late payment in the last seven years, it’s still on your record, but if you have been making on-time payments since then, your score will rebound after one billing cycle. And after 12 to 18 months, your score will be significantly better.

You can also take comfort in knowing that once you have moved the debt from your credit card to a personal loan, your credit utilization ratio will be lower, in turn raising your credit score.

Staying out of debt means keeping your house in order

Taking out a personal loan to pay off credit card debt can save money and shorten the path to becoming debt-free, but it isn’t a cure-all. As Achieve’s research has shown, many consumers carrying credit card debt are using it to cover essential expenses, not discretionary spending. That’s why it’s important to address the financial pressures that contributed to the debt in the first place.

Once credit card balances are paid off, unexpected expenses or ongoing budget shortfalls can make it easy to rely on those accounts again. Without a plan to manage future expenses, borrowers risk accumulating new credit card debt while still repaying their personal loan.

According to the Achieve Center for Consumer Insights, “As we’ve seen with our own research, the majority of people struggling with credit card debt aren’t doing so because they’re irresponsible. They are struggling to deal with essential expenses.”

The best time to pull the trigger on a personal loan is only after you have established a strict household budget and built a starter emergency fund to prevent future credit card reliance.

Creating a budget can be a soul-searching process that forces you to confront uncomfortable truths about your financial situation. But it will give you clarity.  If you find that your debt payments are consuming a significant portion of your income or you’re struggling to make minimum payments, it may be worth exploring options such as credit counseling, debt relief or bankruptcy protection. The experts at Achieve can help you decide on the best route for you.

Frequently Asked Questions: Using a Personal Loan to Pay Off Credit Cards

When does it make sense to use a personal loan to pay off credit card debt?

It makes financial sense when you can qualify for an interest rate substantially lower than your current credit card APRs and you are fully committed to not accumulating new debt. By switching to a fixed-rate personal loan, you bypass the trap of minimum credit card payments and secure a structured, predictable timeline to become completely debt-free.

How much money can I actually save by consolidating credit card debt?

The savings in both time and interest can be massive. For example, paying off a $5,000 credit card balance at a 22% APR making only minimum payments takes over 19 years and costs about $8,100 in interest alone. Moving that exact same debt to a 3-year personal loan at a 12.5% APR drops your total interest to roughly $1,000. That saves you over $7,000 and gets you out of debt 16 years faster.

Do I need a good credit score to get a personal loan for debt consolidation?

Generally, yes. To secure a personal loan rate that is actually lower than your credit card (average personal loan rates for good credit sit between 12.27% and 14.48%), you should aim for a Good or Very Good credit score (a FICO score of 670 or higher). If your score is in the “Fair” or “Poor” range, it’s important to compare the personal loan APR you qualify for against your current credit card rates. But even if the savings are smaller, a lower-rate personal loan may still reduce interest costs and provide a more predictable repayment schedule.

Are there any extra fees when using a personal loan?

You need to factor in origination fees, which lenders charge to process the loan. These fees typically range from 1% to 8% of the total loan amount and are either deducted from your funds upfront or added to your total loan balance. You should always run the numbers, but in most cases, a personal loan still saves you thousands of dollars even after accounting for a standard origination fee.

What is the biggest risk of paying off credit cards with a personal loan?

The greatest danger is falling into the double debt trap. Once your personal loan clears your credit card balances to zero, you suddenly have thousands of dollars in available credit again. If you haven’t fixed the spending habits that caused the debt or built a starter emergency fund, you risk running those cards right back up — leaving you with a heavy new personal loan payment layered on top of fresh credit card debt.