3 Steps to Take Before You Get a Personal Loan to Pay Off Credit Card Debt

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It’s best to approach debt payoff with a solid plan. Keep reading to learn why this applies when you’re getting a debt consolidation loan. 

Credit card debt typically comes with a very high interest rate. As of August 2023, the average interest rate on credit cards was 21.19% By contrast, personal loans generally don’t have such high rates. The average rate on a personal loan as of that same time period was 12.17%.

In many cases, you can take out a personal loan and use it to pay off your credit card debt. This would generally lower the rate you pay. It would also mean that you’d have a fixed-rate loan with a set payment schedule, instead of a credit card that allows you to pay the minimum for decades.

Making this move can make a lot of financial sense in many situations. But before you move forward, there are a few key moves to make first.

1. Make sure you have a payoff plan

When you get a personal loan, you will have a fixed loan term, and your monthly payments are most likely going to be higher than the minimum payment due on a credit card. That’s because your payments will be targeted to ensure you become debt free at the end of the loan repayment term (which often lasts about two to seven years, depending on the lender.)

Let’s say you had a $5,000 credit card balance on a card with a 21.19% interest rate. If your minimum payment was 2% of your card’s balance, you’d have to make a payment of around $100 a month and, as your balance declines, you’d see that minimum payment fall with it so you’d have a smaller required payment each month.

On the other hand, if you took out a personal loan with a two-year repayment term and a rate of 12.17%, your monthly payment would be higher — but your total payment costs and repayment time would be a lot lower, as the table below shows:

The personal loan seems to clearly be the better choice — but you do need a plan to be able to make the monthly payments. If you’d struggle to come up with $235.75 and fear you’d risk defaulting on your loan, you’re better off waiting until you’re more financially stable and ready to work on becoming debt-free.

2. Make sure your spending is under control

There’s another really important step you’ll want to take as well: You need to make sure your spending is under control.

See, when you pay off your credit cards with a debt consolidation loan, you make that credit available on your cards again. If you don’t have a spending plan, you might fall back into the habit of charging more on your cards again. You could end up running up a credit card balance and having the personal loan to pay, so your debt balance could become a lot bigger.

To make sure this doesn’t happen, make a budget that allows you to spend within your means and make sure you can stick to it before moving forward.

3. Ensure your credit is good enough to get a reasonable rate

Finally, refinancing to a personal loan makes sense only if you can get a good rate. And you’ll need pretty good credit to do that. You can improve your credit score by making all of your current debt payments on time. If you have late payments on your record, you can also try asking your creditors to remove them as a gesture of good will if you are generally a good customer.

By taking these three steps, you can make sure that getting a personal loan to pay off credit card debt is the smartest move for you.

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