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Should you get an unsecured personal loan to pay off high-interest credit card debt?

The answer is – it depends.

It is a good idea for those who actually eliminate their obligations rather than convert them into an opportunity to continue spending.

It is a bad idea if you do not qualify for lower interest rates or longer repayment terms. A settlement program may be a better fit for this much larger group.

Compare the pros and cons of using personal loans to refinance credit card debt to determine whether this approach is best for you. Can you handle fixed monthly payments that force a gradual reduction?

Bad Idea: Personal Loans to Consolidate Credit Cards

Taking out an unsecured personal loan to consolidate high-interest credit card debt is a bad idea for many people with poor borrowing credentials. Transferring revolving debt over to an installment contract simply changes repayment terms.

It does not make things better. People with large revolving balances frequently have poor FICO scores. This makes it difficult to gain an approval with the best terms: a longer repayment period, and lower interest rates.

Difficult to Qualify

Do you qualify for debt relief? (Affiliate Link) It will be difficult to gain an approval for a personal loan if you owe more than $10,000 in credit card debt and have a low FICO credit score as a result. A settlement program may be the better option.

The third-party company will consolidate your payments into an escrow account. They will negotiate with the issuing banks once you have accumulated a sufficient escrow balance. If successful, you will actually reduce the amount owed. This is far better than merely converting to a different type of obligation.


Short repayment terms are the second possible disadvantage of getting a personal loan to consolidate credit card debt. People with low FICO scores find it difficult to win approval for contracts with monthly installment payments stretching out for years.

  1. Short repayment terms translate into higher monthly payments. This makes the situation worse.
  2. Revolving accounts have flexible terms and relatively low minimum monthly payments.

Converting from a revolving contract with flexible lower monthly payments to an installment contract with fixed higher monthly payments may cause delinquency. Payment history makes up 35% of your rating and remains on your consumer report for seven years.

Late payments make your situation even worse.

Similar Rates

Similar interest rates are the third possible drawback to taking out a personal loan to consolidate high-interest credit card debt. Online lenders do not offer the best interest rates to people with low FICO scores because of high revolving balances.

You are not saving any money if the interest rate remains the same on the new account. In fact, you could boost costs by ignoring the origination fee.

The online lender may charge a one-time upfront origination fee. Expect to pay from 1% to 5% in origination fees based on your qualifications and length of the term. The lender should disclose the annual percentage rate (APR) which includes two factors.

  1. Origination fee
  2. Periodic interest rate

More Open to Buy

Increasing the open to buy is the fourth hindrance to getting a personal loan to refinance credit card debt. Open to buy is the difference between the account limit and the outstanding balance.

Rolling your revolving debt to a new contract type frees up the open to buy. The limit remains the same but the balance is now much smaller. This extra spending power is a trap for people who lack financial discipline.

You can easily fall right back into a worse trap if you accumulate new revolving balances. Unfortunately, this outcome is all too common. Most consumers lack the discipline to change behaviors, or one of life’s inevitable trials comes their way.

Good Idea: Personal Loans to Clear Credit Card Debt

Taking out an unsecured personal loan to pay off credit card debt is a good idea when you clear it out permanently. Eliminating high-interest revolving balances has long-term benefits for your FICO score and your overall financial health – as long as it truly goes away and never comes back.

Request a personal loan here. (Affiliate Link) People with verifiable earnings and good ratings despite the high level of revolving debt often qualify. Transfer the revolving balance to the new installment contracts in order to reduce what you owe aggressively.

Boost your borrowing credentials by saving money and enforcing discipline with fixed payments.

Save Money

Saving money every month is the first advantage of getting a personal loan to pay down high-interest credit card debt. People with good to excellent ratings often qualify for lower interest rates – even after factoring in the origination fee.

Lower interest rates reduce your cost of holding onto and using the bank’s money. Paying less in interest every month allows you to devote more of your resources towards retiring the principal.

Interest compounds very quickly and traps many consumers into a downward spiral. Reducing rates is the first step towards living a debt-free life!

Fixed Payments

The forced discipline of scheduled and fixed monthly payments is a second benefit of paying off credit card debt with a personal loan. Revolving accounts offer great flexibility. However, the relatively small monthly payment requirements mean that balances can linger for years while the interest continues to compound.

Personal loans feature fixed monthly installment payments with a scheduled expiration. The balance is zero at the end of the term. In other words, they force consumers to retire the entire obligation in a set period.

They work like a strict schoolmarm holding you accountable!

Improve FICO Score

An eventual boost in your FICO score is the final advantage of taking out a personal loan to reduce credit card debt. Expect your ratings to drop at the beginning and then gradually improve as you shrink the amount of money owed.

The strategy will affect your ratings most directly in two of the five important factors – provided you repay the new obligation on time and according to terms.

New Account Activity

New account activity makes up 10% of your FICO score. A new account suggests a riskier profile until the person demonstrates the ability to handle the new obligation responsibly.

  1. A hard inquiry will depress ratings slightly at the one bureau providing the consumer report
  2. The newly reported account will suppress ratings at all three bureaus
  3. Ratings will gradually improve as the age of the new account grows older

Amounts Owed

The amounts owed make up 30% of your FICO score. Your debt level remains unchanged during the initial phase. The important debt ratios change in opposite directions and cancel each other out at the beginning.

  1. Revolving utilization ratio improves after you transfer the balance. The equations calculate this utilization percentage by dividing the total balances by the cumulate limits.
  2. Installment utilization ratios always begin at 100% and trend lower over time. The amortization schedule determines what portion of each payment goes towards retiring the principal.

The installment utilization ratio improves (drops) which each on-time payment you make. It always solves to 0% at the end of the contract. This could take several years depending on the term of the contract. Completing the process is of great benefit to your ratings.

A resumption in credit card spending has the opposite effect. The extra open to buy proves tempting over the course of five years. New revolving balances push the second utilization ratio higher and cancel out any benefit to your rating

In other words, getting a personal loan to eliminate card debt is a great idea – only if you pay on time and can keep the revolving balances from coming back.