Here's What Happens When You Pay Off Your Credit Cards With a Loan

I hate credit card debt with a capital "H." It's one of the biggest things holding people back financially, and for most, it's the relentless 20%+ interest that makes it feel like you're treading water no matter how hard you try.

But what actually happens when you swap those high-interest cards for a single personal loan?

I've seen this play out first-hand with friends and readers. When done right, it's like pressing "pause" on a house fire -- it gives you the breathing room to finally put the fire out for good.

Here is exactly what happens to your money and your credit when you pull the trigger on a consolidation loan.

1. You instantly slash your interest rate

This is just easy math. The average credit card APR currently sits around 20%, while the average personal loan rate is closer to 12%. (These are just averages -- if you have good credit, personal loan rates can be much lower.)

Let's look at a $10,000 balance over five years:

• On a credit card: You'd pay roughly $5,896 in interest.
• With a personal loan: You'd pay about $3,346 in total interest.

That is $2,550 staying in your pocket just for switching the "container" your debt lives in. Even if you have less-than-perfect credit, a personal loan can be way cheaper than a revolving credit card balance.

Another option that can save you a ton is using a 0% intro APR balance transfer credit card. Some offer up to 21 months of no interest -- and if you can pay off your entire balance in that time you could avoid interest altogether.

2. Your credit score might actually go up

Most people worry that taking out a new loan will tank their credit. While you'll probably see a small, temporary dip from the "hard inquiry" on your report, the long-term impact is usually a massive win.

Here's why:

• Lower utilization: 30% of your FICO® Score is based on credit utilization (how much of your card limits you're using). When you pay off those cards with a loan, your utilization drops to 0%, which can add dozens of points to your score in a matter of weeks.
• Better credit mix: Lenders like to see that you can handle different types of credit. Adding an installment loan (the personal loan) to your mix of revolving credit (the cards) accounts for 10% of your score.

3. Your budget gets way less complicated

I'm a huge fan of making finances less complicated. Juggling four different credit cards with four different due dates and four different minimum payments is a logistical nightmare.

When you consolidate debt, you move to one fixed monthly payment and one clear payoff date. Unlike credit cards, where the "minimum payment" trap can keep you in debt for decades, a personal loan has a finish line.

4. The "catch-22": You risk the double-debt trap

Here is the truth nobody likes to hear: If you don't fix the spending habits that caused the debt in the first place, a personal loan is just a short-term patch.

The biggest danger of paying off your cards with a loan is seeing those $0 balances and feeling like you don't have debt anymore. If you charge those cards back up while still paying off the loan, you'll end up in a worse spot than where you started.

How to do it the right way

If you're ready to hammer down your debt, here is my "Foolish" game plan:

• Check your credit score first: You'll typically want a 670+ FICO® Score to snag the best personal loan rates.
• Compare the fees: Some loans have "origination fees." Make sure the interest savings outweigh any upfront costs.
• Put payments on auto-pilot: Make sure to set up auto-pay so you never miss a due date, which protects your credit score and prevents late fees.
• Consider a 0% intro APR card instead: If your debt is smaller (under $5K-$7K) and you can pay it off in 18-21 months, a 0% intro APR balance transfer card might actually be cheaper because the interest rate is literally zero during the promo window.

Moving credit card debt to a personal loan is one of the most powerful tools in the shed. It turns a "someday" payoff goal into a plan you can more easily focus on.

And if you've got a smaller balance and want to avoid interest altogether, check out today's top 0% intro APR credit cards to see if you can transfer your balances and pay them off interest-free.