How a personal loan can replace credit card balances
A personal loan is money you borrow from a bank, credit union, or online lender and repay in fixed monthly instalments over a set period — usually two to seven years. When you use it to pay off credit cards, you're replacing high-interest debt with lower-interest debt, which reduces what you owe each month and cuts the total interest you'll pay over time.
The math works because credit cards typically charge 18% to 25% interest, while personal loans usually range from 6% to 36% depending on your credit score and the lender. Even at the higher end of personal loan rates, you're often paying less interest than you would carrying a credit card balance. The catch is that you're borrowing a lump sum upfront — you don't get the flexibility to borrow more as you spend, the way you do with a credit card.
This strategy works best if you have a clear plan to stop using the credit cards after you pay them off. If you pay off the cards with a personal loan and then run up the cards again, you'll end up with both debts.
Key Takeaways
- Personal loans typically charge 6% to 36% interest, which is usually lower than the 18% to 25% you pay on credit cards, so the total cost of borrowing drops.
- You receive the full loan amount upfront and repay it in fixed monthly payments, which makes your debt predictable and easier to budget for.
- Your credit score affects the interest rate you receive — the higher your score, the lower your rate — so checking your score before you shop for loans saves money.
- Taking out a personal loan will temporarily lower your credit score, but paying it off on time rebuilds it faster than carrying credit card balances.
- This strategy only works if you stop using the paid-off credit cards; running them back up means you'll owe both the loan and new card balances.
What happens to your credit score when you take out a personal loan
When you explore for a personal loan, the lender checks your credit report, which causes a hard inquiry. This drops your score by a few points — usually 5 to 10 points — and the drop is temporary. Multiple applications within a short window (typically two weeks) count as a single inquiry, so shopping around for the best rate doesn't multiply the damage.
Once you're approved and take the loan, your score may drop further because you now have more total debt. However, personal loans affect your score differently than credit cards do. Credit cards measure your score partly on how much of your available credit you're using (your utilization ratio). A personal loan doesn't have a utilization ratio — it's just a fixed debt you're paying down. So if you pay off your credit cards with the loan and stop using them, your utilization drops to zero, which actually helps your score recover.
Over time, making on-time payments on the personal loan rebuilds your score faster than carrying credit card balances does. After 12 to 24 months of consistent payments, your score is usually higher than it was before you took the loan.
Comparing personal loans to balance transfer cards and debt consolidation
A balance transfer credit card is a card that offers 0% interest for a promotional period — usually 6 to 21 months — if you transfer your existing balances to it. After the promotional period ends, the interest rate jumps to the card's regular rate, which is typically 15% to 25%. Balance transfers work well if you can pay off the entire balance during the 0% period, but they charge an upfront fee (usually 3% to 5% of the amount transferred) and require good credit to may have access to.
A debt consolidation loan is a personal loan marketed specifically for paying off multiple debts. It's not a different product — it's a personal loan with the same rates and terms — but the lender may handle the payoff differently. Some consolidation lenders pay your creditors directly; others give you the money to pay them yourself. The advantage is simplicity: one payment instead of many. The disadvantage is that you're still paying interest over the life of the loan, whereas a balance transfer card charges zero interest during the promotional period.
A personal loan makes sense if you have fair to poor credit (balance transfer cards require good credit), if you want a fixed payoff date and payment amount, or if you can't pay off the balance within a balance transfer's promotional window. A balance transfer makes sense if your credit is good, you can pay off the balance in 12 to 18 months, and you want to avoid interest entirely during that time.
Steps to take before you explore for a personal loan
Check your credit score before you shop for loans. You can get your score free from your bank, your credit card issuer, or websites like Credit Karma or AnnualCreditReport.com. Knowing your score tells you what interest rate range to expect and helps you decide whether to explore now or wait a few months to improve your score first.
Add up the total credit card balances you want to pay off. This is the loan amount you'll need to request. Don't borrow more than you owe on the cards — borrowing extra to pay off other debts or cover expenses means you're taking on more debt overall, which defeats the purpose.
List the credit cards you plan to pay off and their current interest rates. This shows you how much interest you're currently paying and helps you calculate how much you'll save with a personal loan. You can compare this to the loan's total cost (interest plus any fees) to see whether the loan actually saves you money.
Decide how long you want to take to repay the loan. Shorter repayment periods (two to three years) mean you pay less total interest but have higher monthly payments. Longer periods (five to seven years) lower your monthly payment but cost more in interest. Use a loan calculator to see both options.
Where to find personal loans and what to compare
Personal loans come from banks, credit unions, and online lenders. Banks and credit unions often have lower rates if you're an existing customer, but they may have stricter credit requirements. Online lenders approve a wider range of credit scores but sometimes charge higher rates.
Get quotes from at least three lenders before you decide. Each quote shows you the loan amount, interest rate, monthly payment, repayment term, and any fees (origination fees, prepayment penalties, or late fees). Compare the total cost of the loan, not just the monthly payment — a loan with a lower monthly payment might cost more overall if it stretches over a longer period.
Watch for prepayment penalties, which some lenders charge if you pay off the loan early. If you plan to pay off the loan faster than the stated term, a lender without a prepayment penalty saves you money. Most online lenders don't charge prepayment penalties; many banks and credit unions do.
What to do after you receive the personal loan
Once the loan is funded, use the money to pay off your credit cards in full. Some lenders send the money directly to your creditors; others send it to you. If you receive the money yourself, pay the credit card balances when ready — don't hold the cash or spend it on other things.
After you pay off the cards, leave them open but unused. Closing them when ready can hurt your credit score because it reduces your total available credit and shortens your credit history. Keeping them open with a zero balance helps your credit score recover faster.
Set up automatic payments for the personal loan so you don't miss a payment. Missing even one payment damages your credit score and may trigger a higher interest rate. Automatic payments may support the loan gets paid on time every month.
Avoid running up the credit cards again. The whole point of taking the loan is to replace high-interest debt with lower-interest debt and then pay it down. If you use the cards again, you'll end up owing both the personal loan and new credit card balances, which is worse than where you started.
When a personal loan doesn't make financial sense
If your credit score is very low (below 580), you may not be approved for a personal loan, or the interest rate may be so high that it's not much better than your credit card rate. In this case, focus on paying down the credit cards directly or look into a balance transfer card if your score improves.
If you have only a small credit card balance (under $2,000), the fees and interest on a personal loan might cost more than paying off the card directly. Calculate the total cost of the loan and compare it to what you'd pay if you aggressively paid down the card over 12 to 24 months.
If you're not confident you can stop using the credit cards, a personal loan won't solve the underlying problem. In this case, consider working with a nonprofit credit counselor (through the National Foundation for Credit Counseling) to build a budget and debt payoff plan before you take on more debt.
Frequently Asked Questions
Will paying off my credit cards with a personal loan hurt my credit score?
Yes, but temporarily. The hard inquiry and new loan lower your score by 5 to 15 points initially. However, paying off the credit cards reduces your utilization ratio to zero, which helps your score recover. After 12 to 24 months of on-time loan payments, your score is usually higher than it was before.
Can I use a personal loan to pay off credit cards if I have bad credit?
It depends on how bad. Lenders typically approve personal loans for credit scores of 580 and above, though rates are higher for lower scores. If your score is below 580, you may need a co-signer or should focus on paying down the cards directly first to improve your score.
What if I can't afford the personal loan payment?
Contact the lender when ready and ask about income-driven repayment options or loan modification. Some lenders can extend the repayment term to lower your monthly payment, though this increases the total interest you pay. Missing payments damages your credit and may result in legal action.
Should I close my credit cards after I pay them off?
No. Closing them reduces your available credit and can hurt your score. Keep them open with a zero balance. You can use them occasionally for small purchases you pay off when ready, which keeps the accounts active without running up balances.
How long does it take to get approved for a personal loan?
Online lenders typically approve and fund loans within one to three business days. Banks and credit unions may take five to seven business days. Some lenders offer same-day funding, though this usually comes with higher fees or interest rates.