How to Use Loans to Pay Off Credit Card Debt

How it works

You take out an unsecured personal loan for roughly the total of the card balances you want to pay off. The lender either deposits the money in your bank account or, with some lenders, pays your card issuers directly. You then repay the loan in equal monthly installments over a fixed term, typically 24 to 84 months.

Unlike a credit card, a personal loan is an installment loan: the rate is usually fixed, the payment doesn't change, and the balance reaches zero on a known date if you make every payment.

When it can save you money

Consolidation tends to help when the loan's APR — which includes any origination fee — is meaningfully lower than the average APR on your cards. Credit card APRs commonly run above 20%, while personal loan APRs range widely, from single digits for borrowers with excellent credit to the mid-30s for those with weaker credit.

• Your credit score has improved since you opened your cards
• You carry balances on several high-APR cards
• You can afford the fixed monthly payment comfortably
• You're committed to not running the card balances back up

Example: $15,000 at 24% APR on cards, paid over five years, costs about $10,900 in interest. The same balance on a five-year loan at 14% APR costs about $5,900 — roughly $5,000 less, before fees.

When it may not be the right move

• The only loan offers you qualify for have APRs similar to or higher than your cards
• Your balance is small enough to pay off within a few months by budgeting
• A long loan term would lower your payment but raise your total interest
• Spending, not interest, is the root cause — new card balances would put you further behind

If you're struggling to make minimum payments at all, a nonprofit credit counseling agency can review options like a debt management plan. The U.S. Department of Justice keeps a list of approved agencies.

Step by step: consolidating with a loan

1. List every balance. Write down each card's balance, APR and minimum payment. Add the balances to know how much to borrow.

2. Check your credit. Your score largely determines the rate you'll be offered. You can get free credit reports at AnnualCreditReport.com.

3. Pre-qualify with several lenders. Pre-qualification uses a soft credit inquiry, so comparing doesn't affect your score. Marketplaces like HappyPath let you see estimated offers from multiple lenders at once.

4. Compare APR and total cost, not just the monthly payment. A lower payment over a longer term can cost more overall.

5. Account for the origination fee. If a lender deducts a fee from your loan, borrow enough that the deposit still covers your balances.

6. Apply and pay off the cards. If your lender offers direct payment to creditors, use it. Otherwise, pay each card as soon as funds arrive and confirm each balance reaches $0.

7. Keep making minimum payments until each payoff posts, to avoid late fees.

How it affects your credit

Applying for the final loan usually triggers a hard inquiry, which may lower your score by a few points for a while. A new account also reduces your average account age. On the other hand, paying cards down lowers your credit utilization — a major scoring factor — and on-time installment payments build positive history. Many borrowers see their scores improve over the following months, though results vary.

Consider keeping paid-off cards open with a $0 balance, since closing them can raise your utilization ratio.

Common mistakes to avoid

• Comparing interest rates instead of APRs
• Choosing the longest term just for the lowest payment
• Forgetting the origination fee when deciding how much to borrow
• Using freed-up cards for new spending
• Missing a loan payment, which can trigger late fees and credit damage

Sources

• Federal Reserve G.19 Consumer Credit (credit card interest rates)
• AnnualCreditReport.com — free credit reports
• U.S. Department of Justice — approved credit counseling agencies
• CFPB — What is debt consolidation?