Credible takeaways
- There are multiple options to pay off your credit card debt.
- Taking out a loan can impact your credit and incur more debt, but it could also lower your credit utilization and boost your score..
- Some alternatives include using debt repayment strategies or negotiating with your creditors.
No one likes debt, but sometimes it’s necessary to use a credit card to cover an expense. If you do have credit cards, you’re not alone, either; 82% of adults in the U.S. have at least one credit card, with total balances exceeding $1 trillion as of the summer of 2023, according to the Government Accountability Office.
While credit cards may be a necessary convenience, they can also get expensive fast. Fortunately, you may be able to use a personal loan to pay off your credit card debt, and ideally net yourself a lower interest rate, which can put you on the fast track to paying down your debt.
Understanding credit card debt
Before paying off your credit card debt, it’s important to consider the following:
- Total amount owed: To consolidate credit card debt with a personal loan, you’ll need to know how much you owe. Add up the balances (if you have multiple cards) to find the total. Personal loan lenders may offer loan amounts from $1,000 to $100,000 or more, depending on your credit profile and income.
- Interest rates: Credit cards can be difficult to pay off if you’re only making the minimum payment — both because APRs tend to be higher than on personal loans, and credit card interest compounds if you don’t pay off the interest every month. The average APR for a credit card was 21.51%, according to the Federal Reserve, while a 2-year personal loan was 11.92%. The appeal of using a personal loan to pay off a credit card is often a lower interest rate, a fixed monthly payment with a defined payoff date, and no compounding interest.
- Minimum payments: Add up the total of your minimum payments. You may be able to get a personal loan with an equal or lower monthly payment, especially if you’re willing to pay it off over several years.
A note on APR
The annual percentage rate (APR) accounts for the interest rate and upfront fees the lender charges. It reflects the overall cost of borrowing and is a better tool to use than the interest rate alone when comparing lenders.
The cost of credit card debt
Suppose you have three credit cards totaling $5,500, each with monthly payments adding up to $125 overall and APRs ranging from 21% to 29%. If you only made the minimum payment, you would pay $59,038.10 in total interest and pay off your debt in more than 30 years.
Tip
Cards #2 and #3 have high interest amounts and long payoff times because of compounding interest, which is when you’re charged interest on unpaid interest that rolled over to the next month. This often happens if you only make the minimum payment.
Here’s how a personal loan can consolidate your balances and help you pay off your debt quicker.
Let’s say you take out a $5,500 personal loan that you use to pay off the credit cards above. If it has a seven-year repayment term and a 15% APR, you'd have a $106 monthly payment. Your payment would be lower and, over the span of the loan, you'd only pay $3,415 in interest — which translates to thousands of dollars of savings.
Loan Amounts:
