Here's What Happens When You Take Out a Personal Loan to Pay Off a Credit Card

During the first quarter of 2023, U.S. credit card balances reached $917 billion, while personal loan balances hit $225 billion, according to TransUnion. So it's pretty clear that both are fairly popular borrowing options.

But the interest rate you pay on a credit card balance may be a lot higher than the interest you're charged on a personal loan. As such, if you owe money on a credit card, you may want to consider paying it off with a personal loan. This could be a smart strategy, but you should be mindful of the pitfalls that might ensue.

When you use a personal loan to pay off a credit card

The lower the interest rate on your debt, the less it's apt to cost you. When you use a personal loan to pay off a credit card, you borrow a sum of money and use your loan proceeds to wipe your credit card balance out. You then pay off your personal loan over time, only at a lower interest rate, thereby reaping some savings.

For example, it may be that you're paying off a $5,000 credit card balance at 18% interest. If you're able to take out a $5,000 personal loan at 8% interest, well, that's a big difference in interest rates. So going this route could make sense.

But if you're going to take out a personal loan for the express purpose of paying off a credit card, make sure you use your loan proceeds for that intended purpose. And also, don't borrow extra money just because.

You may be tempted to take out a $6,000 personal loan when you owe $5,000 on a credit card to give yourself some leeway. But remember, the whole point of this strategy is to minimize the amount of interest you're paying on your debt. If you borrow extra, you may not achieve that goal.

What about a balance transfer?

A personal loan isn't your only option when you're trying to pay off a credit card with a high interest rate. You can also look at doing a balance transfer, where you move your balance from one card to another. Many balance transfer offers give you a limited-time 0% introductory rate, and that reprieve from paying interest could help you get ahead of your debt. Note that you may have to pay a balance transfer fee, often amounting to about 3% of the balance you're moving over.

In fact, you're not going to find a personal loan at 0% interest. So going the balance transfer route may be a better option if you're convinced you'll be able to pay off your debt before that introductory period comes to an end. If not, then a personal loan may be your better bet.

All told, using a personal loan to pay off a credit card balance is a fairly common practice. And if you owe money on multiple credit cards, it could be a good way to consolidate your debt and make it easier to manage.

But make a point not to borrow extra money in personal loan form if you're going this route. And also, shop around for loans so you're able to walk away with the most competitive interest rate you can get.