How to use a personal loan for credit card debt

Ready to crush your debt? You’ve got options. One strategy that might be right for your situation is to take out a personal loan (AKA a credit card consolidation loan). Going this route can help you speed up your payoff plan, lower your cost, and improve your credit score. Bam. 

Researching personal loans for credit card debt isn’t hard if you know what to look for. We’ll break it down.  

What is a credit card consolidation loan? 

A credit card debt consolidation loan is when you use one loan to pay off multiple credit card debts. Credit card consolidation takes different forms: a home equity loan, a balance transfer credit card, a home equity line of credit (HELOC), or a personal loan. 

For many folks, personal loans are the go-to choice for credit card consolidation. Here are a few reasons why:

Installment loan

Personal loans are installment loans. You borrow a lump sum upfront and pay it back through consistent monthly payments over a set period of time. You’ll know your payoff date. Another benefit is that installment debt doesn’t factor into your credit utilization ratio. That’s your credit card balances compared to the limits on your card. If you owe $900 on a card with a $1,000 limit, the utilization is 90%. Credit scores go down as utilization goes up (and vice versa), so moving your balance from a credit card to a loan can bump up your credit score. 

Fixed interest rate

Personal loans have a fixed interest rate for the entire term. Your payment won’t change. Ever heard that “the Fed is raising interest rates again”? When that happens, credit card debt gets even more expensive. But rising interest rates don’t affect personal loans in repayment. Your rate is locked for the life of the loan. 

Unsecured

Personal loans are usually unsecured debt, meaning you don’t need to own a home or sign over the title to your car to get one. 

How to find the best personal loan for credit card debt

Consolidating credit card debt with a personal loan can be easy. Here are the steps you can take.

1. Prequalify and get offers

You’ll start by shopping around to compare loans that are available to someone with your credit score. You’ll want to take notes on interest and fees, the payment amount, and whether you trust the lender to provide helpful information and guidance throughout the process.

It’s a good idea to get prequalified with two or three lenders who can give you loan options without doing a hard pull on your credit. Any time you apply for credit, the lender makes a hard pull (an inquiry) to check your credit report. Each inquiry can lower your credit score by a few points, so you don’t want to apply more often than necessary. The best case scenario is to apply once after you’ve prequalified for the loan you want. Prequalifying isn’t a guarantee but it’ll tell you where you stand.

2. Apply and provide requested documentation

As part of your application, or after you submit your initial application, the lender will tell you what documentation you need to provide. For example, you might be asked for your most recent pay stub. Be sure to include payoff amounts and account numbers for all the debts you want to pay off.

How a personal loan for credit card debt works

Debt consolidation loans are special. If you want to, you can have the lender send your loan funds directly to the credit cards you are paying off, without ever letting the money hit your account. 

That’s different from the way typical personal loans work, which is that you get the money in your bank account and can spend it just about any way you want. 

You can get your debt consolidation loan in your bank account and pay off your creditors yourself. But letting the lender do it can help you get your debts paid off faster so you can avoid racking up even one more day of interest charges. A direct payoff strategy can also get you a permanent discount on your personal loan interest rate.

What you should know before you take out a debt consolidation loan 

Consolidating credit card debt can make the most financial sense for you, but you should only commit to a program if you understand it. Here are some key details to know:

You don’t have to close out your credit cards when you get a consolidation loan, but you might want to.

You don't usually have to close out, or cancel, your existing credit cards when you pay off multiple debts with a personal loan. 

That being said, consider what led you to have high credit card debt. If overspending contributed to your situation, it might not be a bad idea to shut down your cards for a while. If you consolidate your credit card debt with a loan and then run up those balances again, you could end up with even more debt and a much worse financial situation. 

Credit card consolidation can help you get out of debt faster.

Consolidating debt can make it go away quicker. If you get a lower interest rate but keep making the same payment, more of your payment will go toward the principal and you’ll pay off your debt faster. 

The minimum payment on a personal loan is designed to get your debt paid off within five years or less. The minimum payment on credit cards might only be enough to get you out of debt after 20 or 25 years.

Credit card consolidation can lower your monthly payments.

Credit card consolidation might lower your total monthly debt payment. If you are making several high minimum payments, consolidating your debts to a single loan can leave you with a monthly loan payment that’s lower than the total of all those credit card minimum payments. 

But your payment amount also depends on your loan term. If you want to get out of debt faster, opt for a higher monthly payment. If you need relief on your budget, opt for a lower monthly payment, although that means you’ll pay for a longer period of time.

Pros and cons of a personal loan for credit card debt 

Personal loans offer these advantages:

• Unsecured. No home equity or other assets needed.

• Fixed interest rates. Your rate won’t go up as long as you have the loan.

• Lower interest rates. Personal loan interest rates tend to be significantly lower than credit card interest rates, so you can save money.

• Short approval and processing times. Apply online in a matter of minutes. Some applicants can be approved on the same day and receive the funds in 24-72 hours. 

• Improve your credit. A personal loan can help you quickly improve your credit scores.

Here are some potential drawbacks:

• Need at least fair credit. You can get a personal loan with bad credit but it might not save you money compared to your credit cards. If your credit is less than perfect, it’s a good idea to discuss your situation with a loan consultant to determine what option will help you the most.

• Higher interest rates than secured loans. If you have an asset, such as a home, you might save money with a secured loan. 

• Potentially higher monthly payment. Credit card minimum payments are set very low to keep people in debt and paying interest, while personal loan payments are designed to pay off the debt. That means your loan payment could be higher than the required minimum payments on your credit cards. 

• Not a good payoff strategy for the undisciplined.  Consolidating credit card debt with a personal loan—or any loan—can backfire if you don’t have a strong plan to avoid repeating the debt. If your debt was caused by overspending, think about what changes you’ll make going forward before you apply for the loan. 

Top 3 reasons to apply for a personal loan for credit card debt through Achieve

The Achieve personal loan offers a few advantages over other personal loans.

1. Achieve respects your comfort zone. We get it. Credit card debt is stressful and overwhelming. Debt fatigue—where you're exhausted thinking about and managing your debt—is real. 

Achieve understands what you're going through and helps make things easier. We won’t recommend a debt consolidation loan if we don’t think it’s the right solution for your situation. Talk to a loan consultant who can help you choose the right path forward even if it’s a product we don’t offer.

2. Achieve offers multiple ways to get a discount. You can ask for a permanent discount on your interest rate if:

• At least 85% of your loan funds are used to directly pay off creditors

• You can show evidence of retirement savings (don’t worry, it’s not used as collateral)

• You apply with a qualified co-applicant

3. Achieve is flexible. To meet you where you're at, Achieve offers loan repayment terms between two and five years, and loan amounts ranging from $5,000 to $50,000.