Personal Loan vs. Credit Card Debt: Smart Debt Management Strategies

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In some situations, it pays to swap one type of debt for another.

Despite our best efforts to cover our expenses, life sometimes throws us some curveballs, like home or car repairs that can't be put off. When that happens, it's easy enough to rack up a credit card balance.

If you owe money on your credit cards, you may be wondering if consolidating that debt via a personal loan is the right choice. And the answer? It could be.

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The upside of personal loans

A personal loan lets you borrow money for any reason. So if you have several credit card balances hanging over your head, consolidating them with a personal loan could make a lot of sense.

In many cases, you'll qualify for a lower interest rate on a personal loan than what your credit cards are charging you on your debt. This especially holds true if you have a high credit score. As such, using a personal loan to pay off credit cards could make your debt cheaper to eliminate.

Plus, as long as you make your personal loan payments on schedule, having that loan shouldn't hurt your credit score. On the other hand, too much credit card debt can hurt your credit score.

One factor that goes into calculating your credit score is your credit utilization ratio. That ratio measures the amount of available revolving credit you are using at once.

The higher that ratio, the more damage it has the potential to cause. But personal loan balances don't count toward that ratio because they're not considered a revolving line of credit. Rather, personal loans are installment loans that are repaid in fixed amounts over time. So from a credit score perspective alone, a personal loan could be a smarter way to pay off debt.

The downside of personal loans

If you own a home and have a mortgage, you might remember that when you closed on your loan, you had to come up with a pile of money for closing costs. Well, personal loans work similarly in that you'll generally pay closing costs on the sum you borrow. Those fees could eat into the savings you reap by lowering the interest rate on your debt.

What's more, if you have strong credit, it could pay to look into a balance transfer before consolidating your credit card debt with a personal loan. A balance transfer lets you move your existing credit card balances onto a single card. Often, that new card will come with a 0% introductory APR that helps you avoid racking up interest on your debt for a period of time. So if you think you'll manage to pay off your debt before that intro period expires, a balance transfer may be a better bet than a personal loan.

Finally, personal loans generally impose borrowing minimums. If you don't have that much credit card debt, then it may not make sense to take out a personal loan. In that case, a balance transfer may be a more appropriate option to explore.

The bottom line

Using a personal loan to pay off credit card debt is a reasonable course of action. But before you go that route, make sure it's the right choice for you. In some cases, a balance transfer could actually end up being a more cost-effective way to pay off the debt you've accumulated.

The Ascent's Best Personal Loans for 2021

The Ascent team vetted the market to bring you a shortlist of the best personal loan providers. Whether you're looking to pay off debt faster by slashing your interest rate or needing some extra money to tackle a big purchase, these best-in-class picks can help you reach your financial goals. Click here to get the full rundown on The Ascent's top picks.