Can I use a personal loan to pay off a credit card?

Can I use a personal loan to pay off a credit card?

Paying down debt on a credit card with a high interest rate can sometimes feel never ending, especially if a fair portion of your repayments is being absorbed by interest charges and not making much of a dent in the balance owing.

Minimising these interest charges by reducing your interest rate could give you the opportunity to get on top of your debt once and for all.

Since personal loans generally offer lower interest rates than credit cards, you may be wondering whether you might be able to take out a personal loan to pay off a credit card.

Fortunately, you can. And in addition to a reduced interest rate, there are other ways a personal loan might be able to help you pay off your debt.

How could a personal loan help me minimise my debt?

Using a personal loan to pay off your credit card won’t clear your debts for you. But there are ways in which it might make managing your debt a little easier, including the following:

1. A personal loan repayment schedule has a definitive finish line

A credit card is a form of revolving debt that allows you to spend and make repayments as you like, as long as you are meeting your minimum repayments each month. This means that unless you stop using your card altogether and start focusing on paying down the balance, you could find yourself paying it off indefinitely.

In comparison, a personal loan is a type of instalment debt whereby a once-off lump sum is paid to the borrower, who is then responsible for repaying it (plus interest charges) in predetermined monthly instalments for a set period of time. This requires the borrower to stay on top of the debt by actively paying it down by the end of the loan term.

An added bonus to paying your debt off within a set time frame is that you’ll likely also minimise the total amount of interest you’ll pay.

2. A personal loan won’t allow you to add to existing debt 

As long as you close your credit card account once you’ve used your personal loan to pay it off, you’ll no longer have the risk of being tempted to make unnecessary purchases and add to your existing debt. Often, it’s these kinds of purchases that can make it seem impossible to make a dent in your debt.

3. A personal loan’s set repayments can be automated

When your credit card bill comes in each month, you’re responsible for making at least the minimum payment amount by the due date specified on the bill. To an extent, this relies on your memory, making it fairly easy to forget and end up with a late fee and a negative event recorded on your credit file. Unless of course you put a system in place to remind you each month.

Personal loan repayments, on the other hand, can be automated, so that the amount payable comes straight out of your account each month. It can also be easier to budget for, as the payments are typically the same amount each month. Just remember that if your personal loan has a variable rate, you’ll need to budget a little extra in case of an interest rate rise.

What other options should I consider?

Before you get started on your personal loan comparison, it’s worth considering your other options.

A balance transfer credit card

A balance transfer is the process of moving the balance of your existing credit card to a new card that offers an interest free period on the transferred amount. If you are confident that you’ll be able to pay off the balance before the end of the interest free period, a balance transfer credit card could give you the breathing room you need.

But keep in mind, once the interest free period ends, you’ll have to start paying interest on the total balance remaining. Plus, the interest free period doesn’t apply to any additional purchases you make with your new card. So, if you do opt for a balance transfer, it’s a good idea to have a solid plan in place.

Reduce your credit limit

If you’ve managed to pay down your credit card and have excess available on your limit, you could consider asking your credit provider to reduce your credit limit, so you’re not tempted to use it to make more purchases.

Talk to a financial counsellor

Remember, if you feel you are in a debt spiral that you’re struggling to get out of, there is help available. You can access free financial advice by reaching out to the National Debt Helpline.

Did you find this helpful? Why not share this article?



Money Health Newsletter

Subscribe for news, tips and expert opinions to help you make smarter financial decisions

By submitting this form, you agree to the RateCity Privacy Policy, Terms of Use and Disclaimer.


Learn more about personal loans

How are personal loans regulated?

Personal lenders in Australia are regulated by ASIC (the Australian Securities & Investments Commission) and must follow responsible lending rules. That means they can’t lend money without making “reasonable inquiries” about a borrower’s financial situation and ensuring the loan is “not unsuitable” for them.

Which lenders offer bad credit personal loans?

Several dozen lenders offer bad credit personal loans in Australia. These are generally smaller lenders that aren’t household names.

What is an unsecured bad credit personal loan?

A bad credit personal loan is ‘unsecured’ when the borrower doesn’t offer up an asset, such as a car or jewellery, as collateral or security. Lenders generally charge higher interest rates on unsecured loans than secured loans.

What is debt consolidation?

Debt consolidation is the process of rolling several old debts into one new debt, usually to save money or for the sake of convenience.

What are the pros and cons of bad credit personal loans?

In some instances, bad credit personal loans can help people with bad credit history to consolidate their debts, which can help make it easier for them to clear those debts. This is because the borrower might be able to consolidate several debts with higher interest rates (such as credit card loans) into one single debt with a lower interest rate and potentially fewer fees.

However, this strategy can backfire if the borrower spends the loaned funds instead of using it to repay the new loan. Another disadvantage of bad credit personal loans is that they have higher interest rates than regular personal loans.

What is a bad credit personal loan?

A bad credit personal loan is a personal loan designed for somebody with a bad credit history. This type of personal loan has higher interest rates than regular personal loans as well as higher fees.

When was comprehensive credit reporting introduced?

Comprehensive credit reporting was introduced to make credit reports fairer and more accurate. Under the previous system, credit providers only saw negative information about potential borrowers. Now, they're able to see both positive and negative information, which means that credit providers can see if a borrower’s negative credit behaviour is consistent or a mere one-off.

What is comprehensive credit reporting?

Comprehensive credit reporting is a system which includes both positive and negative information on a person’s credit file. Before comprehensive credit reporting was introduced, only negative information was included.

What is a personal loan?

A personal loan sits somewhere between a home loan and a credit card loan. Unlike with a credit card, you need to sign a formal contract to access a personal loan. However, the process is easier and faster than taking out a mortgage.

Loan sizes typically range from several hundred dollars to tens of thousands of dollars, while loan terms usually run from one to five years. Personal loans are generally used to consolidate debts, pay emergency bills or fund one-off expenses like holidays.

What is a secured bad credit personal loan?

A bad credit personal loan is 'secured' when the borrower offers up an asset, such as a car or jewellery, as collateral or security. If the borrower fails to repay the loan, the lender can then seize the asset to recoup its losses.

How do you get a bad credit personal loan?

You can get a bad credit personal loan by applying directly to a lender, by going through a mortgage broker or by using a comparison website like RateCity.

How much can I borrow with a personal loan?

It’s unusual for a lender to provide a personal loan of above $100,000, although there is no formal limit. As with all lending products, each lender sets its own policies, while each borrower is assessed on a case-by-case basis.

How much can you borrow with a bad credit personal loan?

Borrowers who take out bad credit personal loans don’t just pay higher interest rates than on regular personal loans, they also get loaned less money. Each lender has its own policies and loan limits, but you’ll find it hard to get approved for a bad credit personal loan above $50,000.

What are the pros and cons of debt consolidation?

In some instances, debt consolidation can help borrowers reduce their repayments or simplify them. For example, someone might take out a $7,000 personal loan at an interest rate of 8 per cent so they can repay an existing $4,000 personal loan at 10 per cent and a $3,000 credit card loan at 20 per cent.

However, debt consolidation can backfire if the borrower spends the extra money instead of using it to repay the new loan.