Published June 27, 2024

Is It a Good Idea to Pay Off Your Credit Cards With a Personal Loan?

Swapping high-interest credit card debt with a lower-interest personal loan can make sense if you're careful.

A stack of credit cards.

So, you've got some nagging credit card debt that's keeping you up at night. You've heard whispers about using a personal loan to make it disappear, but is it really the magic solution it sounds like? Let's break it down, and see if this move might be right for you.

The Good Stuff: Potential Upsides

1. Boosting Your Credit Score

One of the biggest perks? Giving your credit score a nice little boost. You see, a big chunk of your credit score comes from your credit utilization ratio—basically, how much credit you're using compared to how much you have available. Paying off your credit card balances with a personal loan reduces this ratio and can make your score look more impressive.

Picture this: if you've got $10,000 of credit available and you're using $7,000, you're at a 70% utilization rate. But if you pay off that $7,000 with a personal loan, your utilization on the cards drops to zero. Suddenly, your credit score might start looking a lot friendlier.

2. Lower Interest Rates

Let’s talk interest rates. Those credit cards probably have sky-high rates, right? Personal loans, on the other hand, tend to have much lower interest rates. Over the lifetime of the loan, this can save you a bundle. Instead of getting hit with 18% interest every month on your credit card, you might only be looking at 7% with a personal loan. That's some serious savings.

3. Simplified Financial Management

Got multiple cards with different due dates, minimum payments, and credit limits? It can feel like juggling flaming torches. A personal loan can simplify everything into one monthly payment. Fewer bills to worry about can make managing your finances feel like a breezy walk in the park. No more stressing over whether you missed a due date or handling different interest rates.

The Not-So-Good Stuff: Potential Downsides

1. Still Being in Debt

A personal loan is still debt. If you pay off your credit cards with a personal loan but then go wild with those newly cleared cards, you're setting yourself up for disaster. Imagine paying off $10,000 with a loan, then racking up another $10,000 on your cards. Ouch. You'd be in worse shape than when you started. It's crucial to have the discipline not to let those balances balloon again.

2. Higher Monthly Payments

Credit cards often lure us in with those tempting low minimum payments, but personal loans don’t play that game. Your monthly payment will likely be higher with a personal loan since it usually has a fixed repayment term. Make sure you’re absolutely positive you can handle this new payment every month. Defaulting on a personal loan could send your credit score plummeting, and that's a mess you don't want to deal with.

The Bottom Line

So, is using a personal loan to pay off credit card debt a good idea? It can be if you’re careful and committed to not running up those credit card balances again. Paying off high-interest credit cards with a lower-interest personal loan, boosting your credit score, and simplifying payments are all major wins. But remember, you're just shifting debt around, not eliminating it. Staying disciplined and financially savvy is key.

Need other ways to save money while taking control of your debt situation? Check out these tips on spending less in everyday life:

If you can cut your spending enough to prevent another credit card pileup, a personal loan can be a great tool to save money on interest payments.

If you want to take control of your finances and get a handle on where your money goes each month, Latwy offers a free 30-day trial.

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