Should You Use a Personal Loan to Pay Off Your Credit Cards?

Spending yourself into credit card debt is fairly simple; you spend more money on credit cards than you currently have in the bank and repeat until you are maxed out. Getting yourself out of credit card debt, on the other hand, is complicated. There are many options, and none of them are easy.

One of the ways you could consider to pay off your debt is to consolidate all your credit cards into a single debt: a personal installment loan. Then you use that loan to pay off all your credit cards, leaving you with only one easy payment to make each month. Is this the best method for you? Read on to find out.

How personal loans work.

When you take out a personal loan, it will likely be structured as an installment loan. This means you borrow a single lump sum of money and repay the loan in a series of fixed, regular payments that include both principal and interest.

The interest rate on your personal loan could vary depending on your credit score. The higher your score, the more creditworthy you will be to a potential lender and the less interest they may charge you. Conversely, the lower your score, the riskier you will seem and the more interest they may charge you.

Interest on installment loans is accrued over time; the longer a loan is outstanding, the more interest it will accrue. However, interest will accrue based on the remaining principal, so the actual amount of money you accrue in interest will reduce over time.

Lastly, installment loans are amortizing, which means that every payment you make goes towards both the principal and the interest. The amount that goes towards each is determined by the loan’s amortization schedule. Rest assured that every on-time payment you make will bring you one step closer to decreasing your debt.

Will the loan save you money?

Yes, using a personal loan to pay off credit card debt will most likely save you money in the long run.

Here’s why: the standard term for a personal installment loan is anywhere between one and seven years. No matter how long the loan’s repayment term is, odds are it will be shorter than the length of time it takes to pay off your credit cards by making only the minimum payments.

The monthly minimums for credit cards are often very small, with each payment typically accounting for one to three percent of the amount owed. When interest rates are factored in, it could take years to pay off those cards.

Remember, the longer a loan or credit card is outstanding, the more interest it will accrue. All things being equal, a shorter repayment option will always be the one that saves you money overall.

What’s the interest rate?

Interest rates for both personal loans and credit cards will depend on your credit score. If you have good credit, you will probably be able to qualify for personal loans with a reasonable interest rate.

Furthermore, the interest rates for personal loans are generally lower than the interest rates for credit cards. Even if the rate is higher than you might prefer, it will probably be lower than the rate on your credit card.

However, racking up excess credit card debt could lower your credit score, as the amount of debt you owe is the second most important factor in your credit score. A low credit score could decrease the likelihood of finding an online loan or a loan from a brick-and-mortar lender with a great rate.

It’s a Catch-22 scenario: You want to find a low-cost personal loan to pay down your credit card debt, but you need to pay down your credit card debt in order to qualify for the low-cost personal loan.

What are your monthly payments?

The monthly minimum payments for credit cards are generally small. It's a double-edged sword; small payments make it much harder to get out of debt but they are fairly affordable, especially relative to the amount of debt you owe in total.

This is where we arrive at the biggest issue with consolidating your debt through a personal installment loan: even with a lower interest rate, shorter repayment terms almost guarantee larger monthly payments than the monthly minimums on your credit cards.

If you’re struggling to afford your monthly minimum payments, this could make consolidation a non-starter for you. Saving money in the long run is great, but you still have to be able to afford your payments now.

Here is the flipside: any debt repayment plan will involve paying more each month than your current monthly minimums. Don’t let the larger payments discourage you - trim your budget or consider picking up a second job or side hustle to meet your financial obligations.

What are other methods of debt repayment?

Consolidating your credit cards into a personal installment loan is a viable method of debt repayment, especially if you have a decent credit score, however, it’s not the only method.

The two most popular debt repayment methods are the Debt Snowball and the Debt Avalanche. Both involve putting all of your extra debt repayment funds towards one debt at a time rather than spreading them around. The difference comes in how they prioritize which debts to pay off first.

With the Debt Snowball, you pay off your debt with the lowest balance first, working your way up to the debt with the largest balance. This can cost you a little more money in the end, but it prioritizes early victories that encourage you to keep going.

The Debt Avalanche, on the other hand, focuses on the numbers. You prioritize your debts by interest rate, paying off the highest-rate debt first and then working your way down to the debt with the lowest rate. This saves you money compared to the Debt Snowball, but it could take a while before you achieve your first debt pay-off victory.

Lastly, you could transfer your credit card balances onto other cards using a zero percent APR offer. This takes advantage of an interest-free grace period but carries the sizable risk of leaving you with more credit card debt than when you started.

When paying down debt, you need a plan.

Sha’Kreshia Lewis, CEO of Humble Hustle Finance shared her own story of using a credit card to pay off a personal loan: “You can use a credit card to pay off a personal loan but it may not be the wisest thing to do. It is important to weigh your options and run your numbers before making a decision.

“Speaking from personal experience, I used my credit card to pay off my last couple of payments on my personal loan. The balance on my credit card was at $0 and I paid the credit card off before the month ended. I saved on interest because I paid the loan off before term and I paid the credit card off before any interest accrued.

"It made a huge positive impact on my credit because the loan was paid off in full. The credit card company did not report it to the credit bureau that my balance went up because I paid it off before their next report date came around.”

It comes down to whether you’ll be saving money or not. If you can use your credit card to pay off the loan without paying any additional interest or fees, why not? Otherwise it’s not a good idea.

We’ll leave you with this last bit of advice from Sha’Kreshia Lewis: “Be financially disciplined. One late payment could have you deeper in debt than you were before. It may make more sense to refinance a loan with a lower rate than to put it on a credit card with higher interest.”

Sha’Kreshia Lewis is an AP Clerk in the oil and gas industry. After 6+ years experience in the financial field, she has set out on her own to passionately help others. She is the founder and CEO of Humble Hustle Finance, a financial platform educating emerging adults on the importance of money management.