Which loans work best for paying off credit card debt
The loans most commonly used to pay off credit card debt are personal loans, balance transfer cards, home equity loans, and 401(k) loans. Each one works differently and costs you different amounts depending on your credit score, how much you owe, and what collateral you have. A personal loan from a bank or credit union typically offers a fixed interest rate and a set repayment schedule — you borrow a lump sum, use it to pay off your cards in full, then make one monthly payment instead of several. Balance transfer cards let you move your existing balance to a new card with a temporary low or zero interest rate, usually for 6 to 21 months. Home equity loans and lines of credit use your house as collateral and often carry lower rates because the lender has security. 401(k) loans let you borrow from your own retirement savings, which means you pay interest back to yourself — but you risk your retirement if you cannot repay.
The right choice depends on whether you want to keep your debt unsecured (personal loan, balance transfer) or are willing to risk an asset (home equity, 401(k)). It also depends on your timeline: if you can pay off the debt within the promotional period of a balance transfer card, that may cost you nothing. If you need three to five years, a personal loan with a fixed rate removes the risk of rates rising. If you own a home with equity and have stable income, a home equity line of credit often has the lowest rate but the highest risk.
Key Takeaways
- Personal loans from banks and credit unions offer fixed rates and fixed terms, making your monthly payment predictable and your payoff date certain.
- Balance transfer cards charge zero interest for a promotional period (usually 6 to 21 months), but you pay a one-time transfer fee of 3 to 5 percent and face a higher rate after the promotion ends.
- Home equity loans and lines of credit use your house as collateral, which lowers the interest rate but means you could lose your home if you default.
- 401(k) loans let you borrow from your own retirement account at rates set by your plan, but the loan must be repaid within five years or you face taxes and penalties.
- Your credit score, the amount you owe, and how quickly you want to pay it off determine which loan type will cost you the least over time.
Personal loans: fixed rate and fixed term
A personal loan is an unsecured loan from a bank, credit union, or online lender. You borrow a lump sum, receive it in your bank account, and use it to pay off your credit cards. Then you repay the lender in fixed monthly installments over a set period — usually 2 to 7 years. The interest rate is fixed, so your payment never changes. Because the loan is unsecured (you do not pledge collateral), the rate depends entirely on your credit score and income.
Personal loans work well if your credit score is fair to good (usually 620 or higher) and you want certainty about your payoff date and monthly payment. The main drawback is that the interest rate is higher than a home equity loan but lower than what you are probably paying on your credit cards now. You also pay an origination fee (typically 1 to 8 percent of the loan amount) upfront, though some lenders waive it. Credit unions often offer lower rates and fees than banks or online lenders, so if you belong to one, start there.
Balance transfer cards: zero interest for a limited time
A balance transfer card is a new credit card that offers zero interest for a promotional period — usually 6 to 21 months depending on the card and the issuer. You move your existing credit card balances to this new card and pay no interest during the promotion. After the promotion ends, the regular interest rate (typically 15 to 25 percent) applies to any remaining balance.
Balance transfer cards work best if you can pay off most or all of the debt within the promotional period and your credit score is good (usually 670 or higher). You will pay a balance transfer fee upfront — typically 3 to 5 percent of the amount transferred — but if you eliminate the balance before the promotion ends, you save far more in interest than the fee costs. The main risk is that if you do not pay off the balance in time, you suddenly owe interest at a high rate on whatever remains. Also, opening a new card temporarily lowers your credit score and increases your available credit, which can tempt you to run up your old cards again.
Home equity loans and lines of credit: lower rates, higher risk
A home equity loan lets you borrow against the value of your house. If your home is worth $300,000 and you owe $200,000 on your mortgage, you have $100,000 in equity. You can borrow some or all of that equity as a lump sum (home equity loan) or as a line of credit you draw from as needed (HELOC). Both are secured by your house, which means the lender can foreclose if you do not pay.
Home equity loans and HELOCs typically carry interest rates 2 to 4 percentage points lower than personal loans because your house secures the debt. If you have significant equity, stable income, and a long timeline to repay, this can be the cheapest option. However, the risk is real: if you lose your job or cannot make payments, you could lose your home. Home equity loans also have closing costs (typically 2 to 5 percent of the loan amount), though some lenders waive them. A HELOC works like a credit card — you draw what you need and pay interest only on what you use — but the interest rate is usually variable, meaning it can rise if the prime rate rises.
401(k) loans: borrowing from your own retirement
If you have a 401(k) through your employer, you may be able to borrow from it. You borrow from your own account balance, not from a lender, and you pay interest back to yourself. The interest rate is typically the prime rate plus 1 to 2 percent, which is often lower than a personal loan. You can usually borrow up to 50 percent of your vested balance, with a maximum of $50,000, and you have up to five years to repay.
A 401(k) loan sounds attractive because the interest goes back into your account and the rate is low. However, it carries a major risk: if you leave your job or lose your job, the loan typically must be repaid within 60 to 90 days or it is treated as a withdrawal. You then owe income tax on the full amount plus a 10 percent early withdrawal penalty if you are under 59½. You also lose the growth on the money you borrowed, which can cost you far more than the interest you saved. Use a 401(k) loan only if you are certain you will stay employed and can repay it on schedule.
Comparing costs: what each loan type actually costs you
The true cost of each loan type depends on the interest rate, the term, and any fees. Here is how they typically compare for someone paying off $10,000 in credit card debt:
| Loan Type | Typical Interest Rate | Typical Term | Typical Fees | Total Interest + Fees (Approximate) |
|---|---|---|---|---|
| Personal Loan (good credit) | 8–12% | 3–5 years | $100–$800 origination | $1,300–$2,200 |
| Balance Transfer Card | 0% for 12 months, then 18–24% | 12 months (promotional) | $300–$500 transfer fee | $300–$500 (if paid off in time) |
| Home Equity Loan (good credit) | 6–9% | 5–10 years | $200–$500 closing costs | $1,500–$3,500 |
| Credit Card (no action) | 18–25% | Indefinite | None | $1,800+ per year |
These numbers are approximate and vary by lender, your credit score, and current interest rates. The key insight is that any loan option costs less than carrying the credit card debt as-is. A balance transfer card costs the least if you can pay it off within the promotional period. A personal loan costs more upfront but locks in a predictable payment. A home equity loan costs the least per month but puts your house at risk. Doing nothing costs the most.
How to choose the right loan for your situation
Start by knowing your credit score. If it is below 620, personal loans and balance transfer cards will be difficult to get or will carry very high rates. A home equity loan or 401(k) loan may be your only option. If your score is 620 to 669, personal loans are available but at higher rates; balance transfer cards are harder to get. If your score is 670 or higher, all options are open to you.
Next, decide how quickly you want to pay off the debt. If you can pay it off in under two years, a balance transfer card is often cheapest. If you need three to five years, a personal loan offers predictability. If you need more than five years and own a home with equity, a home equity loan or HELOC may be best. If you are unsure whether you can stick to a repayment plan, a personal loan with a fixed term is safer than a balance transfer card, which tempts you with a zero-interest period that ends suddenly.
Finally, consider what you can afford to lose. If you cannot afford to lose your house, do not use a home equity loan. If you cannot afford to lose your retirement savings, do not use a 401(k) loan. If you can afford the monthly payment on a personal loan and you have stable income, a personal loan is the safest choice even if it is not the cheapest.
Frequently Asked Questions
Will taking out a loan to pay off credit cards hurt my credit score?
Yes, initially. A new loan inquiry and a new account will lower your score by 5 to 10 points in the short term. However, paying off your credit cards in full will lower your credit utilization (the amount of available credit you are using), which raises your score over the next few months. Within six months to a year, your score will usually be higher than it was before, as long as you make all payments on time.
Can I use a personal loan to pay off credit cards if I have bad credit?
Personal loans are available to people with credit scores as low as 580 to 620, but the interest rate will be much higher — often 25 to 36 percent. At that rate, a personal loan may not save you money compared to your current credit card rates. Credit unions often offer personal loans to members with lower credit scores at better rates than banks or online lenders. If you cannot get a personal loan, a home equity loan or 401(k) loan may be your only option.
What happens if I cannot repay the loan on time?
If you miss a payment on a personal loan or balance transfer card, the lender will report it to the credit bureaus and your score will drop. If you miss multiple payments, the lender may sue you or send the debt to a collection agency. If you miss payments on a home equity loan, the lender can foreclose on your house. If you cannot repay a 401(k) loan and you leave your job, the unpaid balance is treated as a withdrawal and you owe taxes and penalties. Contact your lender when ready if you think you will miss a payment — many offer hardship programs or payment deferrals.
Should I pay off all my credit cards at once or keep some open?
Pay off all your credit cards with the loan, but keep the accounts open. Closing accounts lowers your available credit and raises your utilization ratio, which hurts your credit score. Keeping them open and unused shows lenders you have credit available but are not using it, which is a sign of financial responsibility. However, do not run up the balances again — that defeats the purpose of the loan.
Can I use a balance transfer card if I have fair credit?
Balance transfer cards typically require a credit score of 670 or higher. If your score is 620 to 669, you may still be approved, but you will likely get a shorter promotional period (6 to 12 months instead of 18 to 21 months) and a higher transfer fee (5 percent instead of 3 percent). A personal loan may be a better option if your score is in the fair range.