Is taking out a loan to pay off credit cards

Credit cards can be useful tools: they allow you to make a purchase “on credit”, repaying the balance at a later date. But you may have heard people ask whether it’s a good idea to take out a loan to pay off credit card debt. Why?

With a credit card, if you repay your balance at the end of each month, you won’t pay any interest, even if you use your whole credit limit. But if you delay repayment, that cost adds up – fast.

As a result, many people in the UK find themselves in a situation where they have thousands of pounds of credit card debt and are only making the minimum payment on their cards, facing a very high rate of interest. Unfortunately, this can lead to a vicious cycle, with credit card users finding it hard to pay off – or even make a dent in – the total balance.

One possible solution here is taking out a personal loan, and using that to pay off credit cards. This is known as debt consolidation.

Our article weighs the pros and cons of taking out a loan to pay off credit card debt. Once you’ve decided if it’s a good idea for you, you might want to take a look at some of the options available to you. Our loan calculator is a great place to start.

Below are a few examples to show how the interest rate and the term (the duration of a loan) affect the total amount you’re repaying. If you want to work out figures for your own circumstances, StepChange has a  which will help.

Is it a good idea to take out a loan to pay off credit card debt?

Debt consolidation loans are usually just straightforward personal loans. That means that you borrow a fixed amount from a lender – enough to cover all your existing debts – and use that sum to pay off your credit cards in full.

Isn’t this simply a case of replacing one form of debt with another? Yes, but there are two advantages that can make this worthwhile:

1. Many borrowers will be able to get a personal loan at a lower rate of interest than they’re currently paying on their credit card. That will save them money, so long as they don’t take longer to pay it off (more on that later).
2. If you have multiple credit cards, it can be hard to stay on top of them all. A debt consolidation swaps multiple credit card bills for one fixed monthly payment.

Imagine a borrower, Katy, has 3 credit cards:

1. An everyday credit card, with an APR of 25%, and £2,500 outstanding.
2. A store card, with an APR of 35%, and £2,500 outstanding.
3. A high-interest credit card, with an APR of 40%, and £5,000 outstanding.

Katy owes £10,000, at a weighted average interest rate of 35% (a weighted interest rate takes into account the relative size of each balance outstanding). So, in this simplified example, Katy can borrow £10,000 to pay off the credit cards and start making a single monthly repayment. And if she can borrow at a rate below 35%, she’ll save money too.

For a more detailed explanation, you can read our full guide to how debt consolidation loans work.

So is it a good idea? There are two questions you need to ask yourself:

Will it save me money?

If you can borrow at a lower rate of interest, in general, you will save money. However, if you take longer to repay the new loan than you would to pay off the credit cards gradually, that won’t be the case.

Why? Consider this simplified example: repay £1,000 at 5% interest over 10 years and you’ll pay £500 in interest.  Repay the same sum at 10% – a higher rate – over two years and you’d pay just £200 in interest.

When considering a debt consolidation loan, you should keep this in mind. If you spread the payments out over a long enough period, you may actually repay a higher total amount, even if the rate is lower. 

Can I afford the monthly repayments?

There’s another side to the coin: while it’s good to pay off debt as quickly as possible, you need to be realistic. If you’re overly ambitious when applying, and end up missing repayments, your credit score will be very badly affected, so it’s crucial that you only borrow what you can afford to repay.

For more information on this topic, take a look at our guide to when debt consolidation is a good idea.

3 benefits of using a personal loan to pay off credit card debt

Take control of your finances

Taking out a personal loan to pay off one or more credit cards will usually simplify your finances significantly. You’ll turn multiple credit card payments into a single loan payment, and the interest and repayments are fixed, so you’ll know precisely what you have to repay each month. 

Monthly payments are usually taken directly from your bank account, making budgeting easier and helping you to stay on top of your money.  

Save money

Done right, using a personal loan to pay off credit card debt can reduce the total amount of interest you repay, so long as the rate on your loan is lower than your credit card interest and you don’t opt for a longer repayment term.

Improve your credit score

The best way to reach an excellent credit score is to regularly make repayments, and pay off your debt. So long as you make the monthly repayments due on a debt consolidation loan, you should see a steady, overall improvement in your credit score. For more information on how this works, take a look at our full guide: does taking out a debt consolidation loan hurt your credit score?

3 drawbacks of using a personal loan to pay off credit card debt

A loan might not solve the underlying problem on its own

Taking out a loan to pay off credit card debt can be a good step towards becoming debt free, but if you’re someone who has a hard time avoiding spending, you might find that you go back into credit card debt. If that’s the case, it’s worth speaking to a debt charity, such as Step Change.

You might have to pay a fee

Some debt consolidation loans come with fees – you should bear this in mind when you look at options. Koyo doesn’t charge any fees when you take out a loan or for early repayments, but for other providers, it can vary.

You may end up repaying more if you get it wrong

A debt consolidation loan is pretty simple, but there are two cases where you may end up paying more than you would if you simply paid off your credit cards over time:

1. Taking out a loan at a higher rate. If your debt consolidation loan is at a higher rate of interest than your existing debt, you’d be paying more interest (assuming you pay it off over the same period). If that’s the case for you, it’s worth being extremely careful when weighing up the pros and cons.
2. Paying off the loan over a longer period than you’d take to pay off your credit cards. Because of the way interest works, a longer period can mean higher total interest payments, even if the rate is lower.

Below are a few examples to show how the interest rate and the term (the duration of a loan) affect the total amount you’re repaying. If you want to work out figures for your own circumstances, StepChange has a useful calculator which will help.

What are some alternative ways to pay off credit card debt?

The most common alternative to paying off credit card debt with a loan is to use a balance transfer credit card, moving across all of your credit card debt.

Many providers offer balance transfer cards with long, introductory interest-free periods, which can be attractive. But it’s worth noting that you’ll generally pay a fee for these accounts (usually calculated as a percentage of the balance you’re moving over), so it’s important to factor this into your calculations.

Frequently asked questions about loans to pay off credit card debt?

What is the best way to pay off credit card debt?

There will be a different answer for everyone here, but as a guiding principle, the best solution is the one that minimises the total interest you have to pay. It’s also essential that your monthly payments are affordable, so you should work out upfront what you could afford, and stay comfortably within it.

Will getting a personal loan to pay off credit cards hurt my credit score?

It’s a good question, and one we’ve answered in full elsewhere: does debt consolidation hurt my credit score? To summarise though, taking out a personal loan to pay off credit card debt will usually have a small negative impact on your credit score in the short term, and will increase your credit utilization ratio. More importantly though, it will have a strong, positive effect as you pay it off. Overall, the impact should be positive – but this will quickly change if you miss payments.

Can I get a loan to pay off credit card debt if I have a low credit score?

Yes, some personal loans should be available to borrowers with bad credit ratings, but it’s likely these will carry a higher rate of interest, and you’ll have less choice.

If that’s the case, you might want to consider an Open Banking lender, such as Koyo, which uses secure technology to safely view your transaction data, allowing it to consider applications based on affordability rather than focusing entirely on your credit report.

How much credit card debt can I pay off with a loan?

The limiting factor is likely to be the total amount you can borrow – i.e. the maximum personal loan amount available to you. For borrowers with a good credit score, this could be in the tens of thousands of pounds; for borrowers with a lower score, that maximum will be considerably lower. 

In order to find out how much you’d need to borrow, you can speak to your card issuer. Any credit card companies with whom you have a relationship will give you an outstanding balance, which you can use to work out how much you’ll need to borrow.

One word of warning – you should avoid secured loans to pay off credit card debts. This kind of lending is secured against your property (usually your house), meaning that you might lose it if you fail to make repayments. Koyo loans are unsecured – you can read more about how secured and unsecured loans compare in our guide to different types of loans.

Next steps

Now that we’ve weighed up the pros and cons of taking out a loan to pay off credit card debt, hopefully, you have a better idea of whether it’s something that could be suitable for you. 

If so, you might want to take a look at some of the options available to you. Our loan calculator is a great place to start, as well as our guide to how to get a debt consolidation loan and how to consolidate credit card debt.

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