Can I use a 0% credit card to clear loan debt – and is it a good idea?

11 min Read Published: 15 Jan 2022

Can you use a credit card to pay off a personal loanIf you have a personal loan and are struggling to keep up with the repayments or want a way of reducing your debt, you may be considering whether you can transfer it to a 0% credit card. In this article we explore how to use a credit card as a way to pay off loan debt, what the advantages and disadvantages are of doing so and outline alternative options. 

Can you transfer a personal loan to a credit card?

There are different types of credit cards that offer cardholders an interest-free introductory period, during which time they only need to make the repayment on the money owed but don't have to pay any additional interest. A popular option is a balance-transfer credit card, which allows users to transfer existing debt from other credit or store cards. However, in most cases it isn't possible to transfer personal-loan debt to a balance-transfer card.

However, all is not lost - there is a way to use a 0% interest credit card to pay off a personal loan. By taking out a money-transfer credit card with a good introductory offer, you can transfer money from the card to your bank account and then use these funds to pay off the loan debt. You then need to make sure you repay the balance on the money-transfer card before the end of the introductory period in order to avoid paying interest on any remaining amount left on the card.

How to use a money-transfer credit card to pay of a loan

1. Find the right money-transfer credit card

When considering which money-transfer card to apply for, the main features you are looking at are:

  • The length of the introductory period: You are ideally looking for the card that has the longest guaranteed interest-free period
  • The money-transfer fee: Some money-transfer cards will charge a fee of a percentage of the balance you want to transfer. This could be anything up to 5%, which could make a significant difference if you are looking to transfer a large amount
  • The credit limit: The amount you can take out will vary from issuer to issuer, but you ideally want to secure a credit limit that will enable you to pay off the total amount outstanding on your personal loan
  • The APR after the introductory period: Although the goal is to pay off the total amount during the introductory period, it is worth considering what the rate on the card will be after this point. There's clearly a big difference between paying 20% APR compared with 40% APR on any balance remaining on the card.

Importantly, you need to find a card you will be approved for, so it pays to use an online eligibility checker on the card provider's website before making a full application. This allows you to get a good idea of whether you are likely to be approved without it leaving a hard footprint on your credit file. It can be detrimental to your credit rating to be turned down for credit, particularly if you apply for several cards in a short space of time.

Our current top-3 money-transfer credit cards are:

Name of card Representative APR Interest-free period Perks Extra information
MBNA 22.9% variable Up to 18 months n/a Interest-free period subject to status - some applicants may get 14 months
Tesco Bank 20.9% variable 15 months Earn Tesco Clubcard points 15 months interest-free on balance transfer and purchases, as well as money transfer
Virgin Money 21.9% variable 12 months Offers through Virgin Group discounts Interest-free periods on balance transfer and purchases

 

Check out our article "A complete guide to the best money-transfer credit cards" for up-to-date information on the most competitive deals on the market.

2. Confirm the loan amount you need to repay

By approaching the lender you have your personal loan with and getting a final settlement figure, you'll know exactly how much you'll need to repay the debt in full and close the account. You can then ensure you have a sufficient credit limit on the money-transfer credit card you choose to apply for.

At this point it is also worth finding out if there are any additional fees payable on the loan and double-checking you are able to repay the loan before the end of the term without any financial penalties.

3. Sanity check your plan

Although theoretically using a credit card to clear loan debt can be a good idea, you need to be realistic about whether you are going to be able to repay the debt in full with the amount you can transfer from the card and, vitally, whether you are then going to be able to pay off the credit card balance in full by the end of the introductory period. Unless you have a particularly high-cost loan, it will typically be significantly cheaper than the amount of interest payable on the credit card after the introductory period. While personal loans start at around 3-4% interest, the APR on a credit card is likely to be 18% or more.

Work out, in advance, how much you will have to repay each month to repay the debt within the introductory period. Then include that within your budget, taking into consideration other expenses you are likely to have over that time and trying to factor in a buffer to ensure the debt is repaid in time. Look to set up a direct debit to make sure you make the repayments on time.

4. Take out the card and pay off the loan

Bear in mind you will typically have a set period of time after taking out the money-transfer credit card to make the transfer into your current account in order to enjoy the 0% interest period. This is typically between 30-90 days, but check with your card provider. As soon as you have transferred the money to your account, use it to pay off the loan, in full. Request written confirmation from the loan company that the debt has been settled and the account closed.

Advantages of using a credit card to pay off a loan

  • If you have a high-cost loan, including a payday loan, using a money-transfer credit card can potentially save you a large amount in interest payments. If the interest rate is relatively low on the loan, you need to consider whether it is worth paying it off early and whether you can afford to make the monthly repayments necessary to pay off the credit-card balance by the end of the introductory period.
  • Some cards have additional perks and benefits, such as the ability to earn points or cashback or the possibility of joining a loyalty scheme offering discounts with certain retailers.

Disadvantages of using a credit card to pay off a loan

  • There is a risk you will end up paying more overall if you don't manage to repay the balance on the card by the end of the introductory period.
  • Depending on the size of your loan debt, it can be difficult to find a card that will give you a credit limit large enough to repay it in full.
  • If you miss any of the repayments, you could immediately forego the interest-free offer, meaning you would have to start paying the debt at the standard APR for the card.
  • There will typically an initial fee charged by the money transfer card of up to 5% of the amount transferred to your bank account

Alternatives to using a credit card to pay off a loan

If you are struggling with repaying your personal loan, a good first port of call is talking to the lender. It may be able to offer you support, including offering payment holidays or extending the term of the loan to reduce the payments. It is worth noting, however, that both of these options result in you having to pay more in interest over the lifetime of the loan and could also be reported on your credit file.

Another option is to see if you can manage your money more efficiently by using a budgeting app, which could then free up extra funds to repay the debt more easily or even to enable you to overpay on the loan and reduce the overall term.

For more serious debt problems, it's worth getting free independent advice from organisations like Citizens Advice or StepChange. There are options such as debt consolidation loans, individual voluntary arrangements, debt relief orders and even bankruptcy, although the ramifications of these are significant and you shouldn't consider them without taking advice.