Should you get a personal loan to pay off credit card debt?

Recent research reveals a troubling trend: nearly half of American households carry credit card debt. On average, Americans with credit cards have $6,194 in debt, according to a recent Experian analysis and The Federal Reserve Bank reports usage is on the rise.

With credit card debt on the balance sheet for many Americans, consumers are turning to personal loans to reduce financial stress and consolidate debt. If you find yourself in a similar situation, you may be wondering: Should I get a personal loan to pay off credit card debt?

Is it smart to get a loan to pay off credit card debt?

A personal loan isn’t revolving credit like a credit card; it’s a type of installment loan, meaning you get the money upfront and pay it back over a set term in monthly increments.

For a personal loan to work when paying off credit card debt, the personal loan needs to have a substantially lower interest rate than the ones on the cards. With the fees involved in taking on a personal loan, a small difference in interest rates won’t make a big impact when consolidating debts.

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“Personal loan interest rates may be lower than your current credit card interest rates,” said fee-only Certified Financial Planner Breanna Reish. “When working through debt they can be used as a tool to pay down debt faster by using a lower interest rate which in turn may result in a lower payment or faster paydown.”

Here are five reasons you should get a personal loan to pay off credit card debt:

1. Lower interest rates
2. Consolidated payments
3. Defined debt-free date
4. Improve credit score
5. Pay down other debt

How to consolidate debt with a personal loan

Check your credit first. Since most of these loans are unsecured — meaning you don’t have to put up any type of collateral in order to obtain one — the rate offered largely depends on how good your credit score is. If you have excellent credit, you'll receive a lower interest rate.

There is a variety of debt consolidation loans. With Credible, you can compare competitive rates in just minutes with no commitment. Enter your loan amount and estimated credit score.

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Loans may also be offered through your local bank or credit union. While it may be tempting to touch the funds for something fun, once the full amount goes into your bank account it is important to use those funds to pay off your balances — and for nothing else.

Then, each month, instead of paying individual card accounts, you’ll make a monthly payment toward your personal loan. Another added benefit is that a personal loan is an installment loan, meaning you can’t continue to rack up more debt.

Pros

• Lowering your interest rate
• Reducing your monthly payment
• Simplifying repayment
• Making debt repayment faster

Lowering your interest rate: If you qualify for a loan at a favorable rate, your new lender should charge you much less in interest than many of the debts you're trying to pay back.

Reducing your monthly payment: Having one new loan at a lower rate often means your monthly payment goes down, freeing up room in your budget. Credible's loan calculator can help you see how much a loan could cost you. Insert the loan amount you're looking for into Credible's free tool to see what kind of rates are currently available. (Check my rate)

Simplifying repayment: If you pay off multiple debts with your personal loan, you'll have just one new lender to pay instead of having to worry about sending several different payments every month.

Making debt repayment faster: When you lower your interest rate, more of your money goes to reducing your debt balance. Unless your personal loan has a much longer repayment term than the debt you consolidated, you can become debt-free sooner.

Cons

• It's expensive
• You're taking on new debt
• You could face higher interest rates

It's expensive: In terms of debt consolidation, taking on a personal loan is one of the more expensive options and should only be utilized when all other avenues (like balance transfers and strict budgeting) are exhausted.

You're taking on new debt: Personal loans mean consumers can take on entirely new debt; those who aren’t careful can get in over their heads and end up with a personal loan and still carry credit card debt.

You could face higher interest rates: It’s also worth noting, 36 percent for a personal loan is higher than the interest rates most credit card companies offer, which typically range between 17-24 percent. For this reason, only those who can score a personal loan at a rate at 15 percent or below will see the substantial savings to be had by using a personal loan to consolidate debts.

Other ways to consolidate credit card debt

• Open a balance transfer credit card
• Use the debt snowball or avalanche repayment methods

Balance transfer credit card: If you can get one, a balance transfer offer from a credit card company with a zero percent introductory APR is even better than taking on a personal loan in order to consolidate debt. While balance transfer offers do come with fees, they allow consumers to consolidate balances at a much lower cost than personal loans and provide a solid timeline for paying off the balance.

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Debt snowball or avalanche methods: These are the two most popular debt repayment strategies to get rid of debt faster.

"Both start with writing down each credit card balance, interest rate, and payoff date. Then each method chooses one credit card to pay off first, while you pay the other cards' minimum balance," Katy Mazzara, a certified financial coach at 168 Media, Inc., previously explained.

“The snowball method chooses the lowest balance card, while the avalanche method chooses the highest APR card,” she added. “Basically, both methods use momentum to get the cards paid down quickly.”

Ultimately, before you decide on any debt consolidation loans, you should take some time to really evaluate your personal finance (with the goal of saving money in mind) and carefully determine which makes the most sense.

“Before shifting any loans you should get your budget and cash flow in order,” Reish advised. “While debts may have accumulated for many reasons, cash flow tends to be one of the main reasons why people have debt. It’s very important to understand how much one can afford to contribute to the debt pay down goal each month before accumulating more debt.”

Christy Bieber contributed to this report.