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The average American carries about $6,455 in credit card debt as of early 2025, and that figure is up by $200 year over year, according to TransUnion®, one of the major credit bureaus.

If you’re struggling with credit debt, whether it’s higher or lower than that average figure, one method to consider is taking out a personal loan (ideally with a lower rate than you’re paying on your credit cards) and using the funds to pay off your credit card debt. If you’re currently paying off multiple cards, this approach also simplifies repayment by giving you just one bill to keep track of and pay each month.

Still, there are pros and cons to consider if you’re thinking about getting a personal loan to pay off credit cards. Read on to learn more.

How Using a Personal Loan to Pay Off Credit Card Debt Works

Personal loans are a type of unsecured loan. There are a number of uses of personal loans, including paying off credit card debt. Loan amounts can vary by lender and will be paid to the borrower in one lump sum after the loan is approved. The borrower then pays back the loan — with interest — in monthly installments that are set by the loan terms. Some details to consider:

•   Many unsecured personal loans come with a fixed interest rate (which means it won’t change over the life of the loan), though there are different types of personal loans.

•   An applicant’s interest rate is determined by a set of factors, including their financial history, credit score, income, and other debt.

•   Typically, the higher an applicant’s credit score, the better their interest rate will be, as the lender may view them as a less risky borrower. Lenders may offer individuals with low credit scores a higher interest rate, presuming they are more likely to default on their loans.

•   When using a personal loan to pay off credit card debt, the loan proceeds are used to pay off the cards’ outstanding balances, consolidating the debts into one loan. This is why it’s also sometimes referred to as a debt consolidation loan. Ideally, the new loan will have a lower interest rate than the credit cards. By consolidating credit card debt into a personal loan, a borrower’s monthly payments can be more manageable and cost less in interest.

•   Using an unsecured personal loan to pay off credit cards also has the benefit of ending the cycle of credit card debt without resorting to a balance transfer card. Balance transfer credit cards can offer an attractive introductory rate that’s lower or sometimes even 0%. But if the balance isn’t paid off before the promotional offer is up, the cardholder could end up paying an even higher interest rate than they started with. Plus, balance transfer cards often charge a balance transfer fee, which could ultimately increase the total debt someone owes.

💡 Quick Tip: Everyone’s talking about capping credit card interest rates. But it’s easy to swap high-interest debt for a lower-interest personal loan. SoFi credit card consolidation loans are so popular because they’re cheaper, safer, and more transparent.

Understanding Credit Card Debt vs. Personal Loan Debt

At the end of the day, both credit card debt and personal loan debt are both simply money owed. However, personal loan debt is generally less costly than credit card debt. This is due to the interest rates typically charged by credit cards compared to those of personal loans. Also, some people can get trapped by paying the minimum amount on their credit card, which leads to escalating debt as the high interest rate kicks in.

The average credit card interest rate was 24.20% in early 2024. Meanwhile, the average personal loan interest rate was about half that. Given this difference in average interest rates, it can cost you much more over time to carry credit card debt, which is why taking out a personal loan to pay off credit cards can be an option worth exploring.

Keep in mind, however, that the rate you pay on both credit cards and personal loans is dependent on your credit history and other financial factors.

Recommended: Balance Transfer Credit Cards vs Personal Loans

Pros and Cons of Using Loans for Credit Card Debt

While on the surface it may seem like taking out a personal loan to pay off credit card debt could be the best solution, there are some potential drawbacks to consider as well. Here’s a look at the pros and cons:

How Frequently Can You Use Personal Loans to Pay Off Credit Card Debt?

Taking out a personal loan to pay off credit cards generally isn’t a habit you want to get into. Ideally, it will serve as a one-time solution to dig you out of your credit card debt.

Applying for a personal loan will result in a hard inquiry, which can temporarily lower your credit score by a few or several points. If you apply for new loans too often, this could not only drag down your credit score but also raise a red flag for lenders.

Additionally, if you find yourself repeatedly re-amassing credit card debt, this is a signal that it’s time to assess your financial habits and rein in your spending. Although a personal loan to pay off credit cards can certainly serve as a lifeline to get your financial life back in order, it’s not a habit to get into as it still involves taking out new debt.

5 Steps to Successfully Pay Off Credit Cards with a Personal Loan

The steps for paying off a credit card with an unsecured personal loan aren’t particularly complicated, but having a plan in place is important. Here’s what you can expect.

Getting the Whole Picture

It can be scary, but getting the hard numbers — how much debt is owed overall, how much is owed on each specific card, and what the respective interest rates are — can give you a sense of what personal loan amount might be helpful to pay off credit cards. You can also use an online personal loan calculator to see how things stack up in detail.

Choosing a Personal Loan to Pay off Credit Card Debt

These days, you can do most — or all — personal loan research online. A personal loan with an interest rate lower than the credit card’s current rate is an important thing to look for. Just be sure you are looking at the loan’s annual percentage rate, which tallies the interest rate and other charges (such as origination fees) to give you a truer picture of the cost of the loan.

Paying Off the Debt

Once an applicant has chosen, applied for, and qualified for a personal loan, they’ll likely want to immediately take that money and pay off their credit card debt in full.

Be aware that the process of receiving a personal loan may differ. Some lenders will pay off the borrower’s credit card companies directly, while others will send the borrower a lump sum that they’ll then use to pay off the credit cards themself.

Hiding Those Credit Cards

One potential risk of using a personal loan to pay off credit cards is that it can make it easier to accumulate more debt. The purpose of using a personal loan to pay off credit card debt is to keep from repeating the cycle. Consider taking steps like hiding credit cards in a drawer and trying to use them as little as possible.

Paying Off Your Personal Loan

A benefit of using a personal loan for debt consolidation is that there is only one monthly payment to worry about instead of several. Not missing any of those loan payments is important — setting up autopay or a monthly reminder/alert can be helpful.

Creating a Budget for Successful Debt Payoff

Before embarking on paying off credit card debt, a good first step is making a budget, which can help you better manage their spending. You might even find ways to free up more money to put toward that outstanding debt.

If you have more than one type of debt — for instance, a personal loan, student loan, and maybe a car loan — you may want to think strategically about how to tackle them. Some finance experts recommend taking on the debt with the highest interest rate first, a strategy known as the avalanche method. As those high interest rate debts are paid off, there is typically more money in the budget to pay down other debts.

Another approach, known as the snowball method, is to pay off the debts with the smallest balances first. This method offers a psychological boost through small wins early on, and over time can allow room in the budget to make larger payments on other outstanding debts.

Of course, for either of these strategies, keeping current on payments for all debts is essential.

Where Can You Get a Personal Loan to Pay off Credit Cards?

If you’ve decided to get a personal loan to pay off credit cards, you’ll next need to decide where you can get one. There are a few different options for personal loans: online lenders, credit unions, and banks.

Online Lenders

There are a number of online lenders that offer personal loans. Many offer fast decisions on loans, and you can often get funding quickly as well.

While securing the lowest rates often necessitates a high credit score, there are online lenders that offer personal loans for those with lower credit scores. Rates can vary widely from lender to lender, so it’s important to shop around to find the most competitive offer available to you. Be aware that lenders also may charge origination fees.

Credit Unions

Another option for getting a personal loan to pay off credit cards is through a credit union. You’ll need to be a member in order to get a loan from a credit union, which means meeting membership criteria. This could include working in a certain industry, living in a specific area, or having a family member who is already a member. Others may simply require a one-time donation to a particular organization.

Because credit unions are member-owned nonprofits, they tend to return their profits to members through lower rates and fees. Additionally, credit unions may be more likely to lend to those with less-than-stellar credit because of their community focus and potential consideration of additional aspects of your finances beyond just your credit score.

Banks

Especially if you already have an account at a bank that offers personal loans, this could be an option to explore. Banks may even offer discounts to those with existing accounts. However, you’ll generally need to have solid credit to get approved for a personal loan through a bank, and some may require you to be an existing customer.

You may be able to secure a larger loan through a bank than you would with other lenders.

Recommended: How to Lower Your Credit Card Debt Without Ruining Your Credit Score

Avoiding the Debt Cycle After Consolidation

Once you’ve paid off your credit card debt, you don’t want to fall back into the same habits that got you in trouble in the first place. Some guidelines:

•   Budget carefully. Try a few different types of budgets until you settle on one that really works for you. Plenty of banks also offer tech tools to help you track the money that’s coming in and going out.

•   Speaking of money going out: Watch your spending carefully. Check in with your money regularly, review your spending habits at least monthly, and scale back as needed.

•   Build an emergency fund (even funneling $25 per paycheck is a smart start) so you can cover unexpected expenses like a big medical bill vs. using your credit card.

•   Avoid credit card spending as much as possible. Use your debit card whenever possible to keep spending in check and avoid interest charges.

The Takeaway

High-interest credit card debt can be a huge financial burden. If you’re only able to make minimum payments on your credit cards, your debt will continue to increase, and you can find yourself in a vicious debt cycle. Personal loans are one potential way to end that cycle, allowing you to pay off debt in one fell swoop and hopefully replace it with a single, more manageable loan.

Whether or not you agree that credit card interest rates should be capped, one thing is undeniable: Credit cards are keeping people in debt because the math is stacked against you. If you’re carrying a balance of $5,000 or more on a high-interest credit card, consider a SoFi Personal Loan instead. SoFi offers lower fixed rates and same-day funding for qualified applicants. See your rate in minutes.

FAQ

Can you use a personal loan to pay off credit cards?

Yes, it is possible to use a personal loan to pay off credit cards. The process involves applying for a personal loan (ideally one with a lower interest rate than you are paying on your credit cards) then using the loan proceeds to pay off your existing credit card debt. Then, you will begin making payments to repay the personal loan.

How is your credit score impacted if you use a personal loan to pay off credit cards?

When you apply for a personal loan, the lender will conduct what’s known as a hard inquiry. This can temporarily lower your credit score. However, taking out a personal loan to pay off credit cards could ultimately have a positive impact on your credit if you make on-time payments, if the loan improves your credit mix, and if the loan helps you pay off your outstanding debt faster.

What options are available to pay off your credit card?

Options for paying off credit card debt include: Taking out a personal loan (ideally with a lower interest rate than you’re paying on your credit cards) and using it to pay off your balances; using a 0% balance transfer credit card; and exploring a debt payoff strategy like the snowball or avalanche method. Other ideas: Consult with a credit counselor, or enroll in a debt management plan.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SOPL-Q225-037

Debt consolidation is a debt payoff strategy that involves taking out a new loan (often a personal loan) to pay off high-interest debts in an effort to streamline monthly payments and save money on interest.

While it can be challenging to get a debt consolidation loan with a bad credit history, you aren’t necessarily out of luck. Some lenders look at factors beyond credit score, such as your income and job history. There are also several actions you can take to increase your odds of getting approved for a debt consolidation loan. Here’s what you need to know.

How to Get a Debt Consolidation Loan With Bad or Average Credit

Even with fair or poor credit, lenders may still consider you for a debt consolidation loan. Here are a few ways to increase your chances of getting approved.

Check Your Credit Reports

Before you apply for a debt consolidation loan, it’s a good idea to comb through your credit reports to see if there are any errors or inaccuracies that could be negatively impacting your score. You’re entitled to a free credit report every week from each of the three major credit bureaus — Equifax®, Experian®, and TransUnion® — at AnnualCreditReport.com.

If you notice any incorrect information (such as wrong accounts, incorrectly reported payments, inaccurate credit limits, or partial information) on any of your reports, you’ll want to reach out to the appropriate credit union and file a dispute.

Reading your credit reports can also give you a sense of your overall credit health and see where there may be areas for improvement.

Shop around

Not all lenders treat bad credit the same way. Some specialize in working with borrowers with lower scores, while others may be more flexible in their qualification criteria. Explore loan options from banks, credit unions, and online lenders. If possible, try to prequalify online. This can give you an idea of what rates and terms you may be able to get but only requires a soft credit pull, which won’t impact your credit score.

Apply with a Cosigner

If you have a friend or family member with good credit willing to cosign the loan, your approval chances can improve significantly. A cosigner agrees to repay the loan if you default, reducing the lender’s risk. Keep in mind, though, that missed payments will impact both your credit and your cosigner’s, so it’s a serious commitment for both parties.

Provide Collateral

Secured personal loans, which require you to provide collateral (such as a vehicle or property) to back up the loan, can be easier to get if you have bad or average credit. The downside is that you’re putting your asset on the line. If you run into trouble repaying the loan, the lender can seize the collateral to get their money back.

Build Your Credit Score

If you’re not in a hurry to consolidate your debt, you may want to focus on building your credit profile before you apply for a consolidation loan. Steps that can help include paying your bills on time, reducing credit card balances, not taking on any new debt, and (as mentioned) addressing any errors on your credit report.

Even small improvements in your credit file can help you qualify for a better interest rate on a debt consolidation loan.

Where to Get a Debt Consolidation Loan with Bad Credit

Trying to find consolidation loans with a bad credit history can feel overwhelming. Here are some good places to look.

Local Banks and Credit Unions

Traditional banking institutions tend to be stringent in their lending criteria. However, if you already have a relationship with a local bank or credit union, they may be willing to work with you based on your overall financial profile, and not simply look at your credit score. Banks and credit unions are also more likely to offer secured loans, which may help you get a better rate.

Online Debt Consolidation Lenders

Online lenders tend to have more flexible qualification criteria for personal loans than banks, and can be a good place to look for debt consolidation loans with bad credit. These alternative lenders also typically offer a simpler application process and are faster to fund than traditional lenders. Just keep in mind that some online lenders charge relatively high rates for borrowers with bad credit, which can make consolidating debt less appealing.

To make sure consolidating debt is worthwhile, use an online debt consolidation calculator to see exactly how much you can save.

Payday Lenders

Payday loans can be easy to get when you have bad credit, but they’re not an ideal choice for consolidating debt. These loans generally come with sky high interest rates — often approaching 400% annual percentage rate (APR) — that can trap borrowers in a cycle of debt. Only consider payday loans as a last resort, and only if you’re certain you can repay the loan on time.

Peer-to-Peer Lending Platforms

Peer-to-peer lending platforms, such as Prosper, Upstart, and Kiva, match borrowers with individual investors willing to fund their loans. Potential lenders will often look at more than just your credit score, including employment status and income, which can make personal loans more accessible to borrowers with less-than-stellar credit.

Nonprofit Financial Assistance Programs

Though not technically a loan, some nonprofit credit counseling agencies offer debt management plans (DMPs), which are another way to consolidate debt with bad credit.

For a small fee, the agency will negotiate with your creditors to lower your interest rates and fees and establish a payment plan that works for you. They then consolidate your payments into one monthly amount. You make a single payment to the counseling agency, which distributes the funds to your creditors.

Pros and Cons of a Debt Consolidation Loan

Getting a consolidation loan to pay off debt isn’t a one-size-fits-all solution. It can be a powerful tool, but it also has its drawbacks.

Pros

•   Simplified payments: Instead of juggling multiple creditors, you’ll only have one monthly payment, which can make budgeting easier.

•   Lower interest rates: If you qualify for a loan with a better interest rate than your existing debts, you could save money in the long run.

•   Can help you rebuild credit: Timely payments on your new loan will help you create a positive payment history, which is a key factor in your credit scores.

•   Reduced stress: Managing a single loan is often less overwhelming, especially when paired with a structured repayment plan.

Cons

•   High interest for bad credit: If your credit is poor, the loan’s interest rate may be almost as high —or higher—than your current debts.

•   Added fees: Some loans come with origination fees, prepayment penalties, or other charges that add to your total debt.

•   Risk of default: Consolidating doesn’t eliminate your debt — it just reshapes it. If you continue spending without changing your financial habits, you could run into trouble repaying your consolidation loan.

•   Collateral risk: If you choose a secured loan and can’t keep up with payments, you risk losing your property or assets.

💡 Quick Tip: Wherever you stand on the proposed Trump credit card interest cap, one of the best strategies to pay down high-interest credit card debt is to secure a lower interest rate. A SoFi personal loan for credit card debt can provide a cheaper, faster, and predictable way to pay off debt.

Debt Consolidation Alternatives

Debt consolidation isn’t your only debt payoff strategy. Depending on your circumstances, other solutions might be more cost effective or less risky.

Home Equity Loans

If you own a home and have built up significant equity, you may be able to take out a home equity loan or home equity line of credit (HELOC) to pay off your existing debts. These loans typically have lower interest rates than unsecured personal loans. However, your home becomes collateral, which means that if you default, you could face losing it. Only consider this option if you’re confident in your ability to repay.

Balance Transfer Credit Cards

A balance transfer credit card allows you to move existing debt from one or more credit cards or loans to a new credit card, ideally one with low or a 0% introductory APR. If you can pay off your balance before the promotional rate expires, you could save significantly on interest. Just keep in mind that you typically need good or better credit to snag a 0% promotional rate.

DIY Debt Management Plans

If you want to tackle your debt on your own, start by making a list of all your existing debts, interest rates, and balances, then choose a strategy — such as the snowball or avalanche approach — to pay them down.

With the avalanche method, you make extra payments on the credit card with the highest interest rate first, while making minimum payments on the others. Once the highest-rate card is paid off, you funnel those extra funds toward the card with the next-highest rate, and so on. This strategy minimizes the amount of interest you’ll pay over time.

With the snowball method, you put extra payments toward the card with the smallest balance first, while making minimum payments on the others. When that card is cleared, you focus on paying off the next-smallest balance, and so on. This gives you quick wins and a psychological boost, which can help you stay motivated.

Debt Settlement

If you’re more than 90 days past due on a debt and suffering financial hardship, you might consider debt settlement. This is a strategy where you negotiate with your creditors to lower your debt in return for one lump sum payment. You can try this yourself or hire a debt settlement company, though the latter often charges high fees.

Just keep in mind that settling a debt can negatively affect your credit file, since settled accounts stay on your credit report for up to seven years. However, for those overwhelmed by debt, it may be a better option than facing ongoing collections or bankruptcy.

The Takeaway

Consolidating debt with a bad credit history can be challenging, but it’s not out of the realm of possibility. With the right strategy, you can streamline your payments, potentially reduce your interest rates, and get back on the path to financial stability.

Start by reviewing your credit reports, exploring all your options, and considering both the short-term benefits and long-term consequences of your decision. Whether through a personal loan, a debt management plan, or another method, the key is to take action and commit to improving your financial habits over time.

Credit cards have an average APR of 20%–25%, and your balance can sit for years with almost no principal reduction. Personal loan interest rates average 12%, with a guaranteed payoff date in 2 to 7 years. If you’re carrying a balance of $5,000 or more on a high-interest credit card, consider a SoFi Personal Loan instead. See your rate in minutes.

FAQ

Can I qualify for a debt consolidation loan with a credit score under 600?

Yes, it’s possible to qualify for a debt consolidation loan with a credit score under 600, but options may be limited and interest rates could be high. Lenders view sub-600 credit as risky, so you may need to show proof of stable income or offer collateral. Some online lenders and credit unions have more flexible borrowing criteria. Comparing offers and considering a cosigner can also improve your chances of approval and more favorable terms.

Will applying for a debt consolidation loan hurt my credit score?

Applying for a debt consolidation loan can temporarily impact your credit score due to the hard inquiry during the application process. However, the effect is usually small and short-lived. If you’re approved and use the loan to pay off high-interest debt, it can positively impact your credit file over time by lowering your credit utilization and adding to your positive payment history.

How much can I borrow with bad credit?

With bad credit, you may still be able to borrow between $1,000 and $50,000. The exact amount you can get with a personal loan varies by lender and is influenced by factors like your debt-to-income ratio and employment history. Expect higher interest rates and possibly shorter repayment terms. Shopping around and considering secured loans or a cosigner can help you access better loan amounts and terms.

Is a personal loan a good way to consolidate debt?

A personal loan can be a good way to consolidate debt if it offers a lower interest rate than your existing debts. It can also simplify repayment by turning multiple payments into one fixed monthly payment. However, approval depends on your credit score and financial stability. If the loan has high fees or interest, it may not be worth it. Always compare offers and check the total repayment amount before committing.

What’s the best alternative to a debt consolidation loan if I’m denied?

If you’re denied a debt consolidation loan, alternatives include working with a credit counseling agency to set up a debt management plan (DMP), negotiating directly with creditors for lower payments, or considering a secured loan using collateral. A balance transfer credit card with a low or 0% promotional rate (if you qualify) can also be effective. In more serious situations, debt settlement or bankruptcy might be last-resort options. Each alternative has pros and cons, so it’s important to assess your financial situation carefully.

Photo credit: iStock/Vladimir Vladimirov

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SOPL-Q325-036

Paying down debt can be an important financial priority, but should you use your savings in order to do so? While it can be tempting to throw your full efforts into paying off debt, maintaining a healthy savings account for emergencies and saving for retirement are also important financial goals.

Continue reading for more information on why it may not always make sense to use savings to pay off debt and ideas and strategies to help you expedite your debt repayment without sacrificing your savings account.

The Case Against Using Savings to Pay Off Debt

While it can feel satisfying to watch your debt balance drop, using savings to achieve that can come with unintended consequences. It’s important to weigh the risks before depleting your savings for the sake of faster debt repayment.

Emergency Funds Provide Financial Security

One of the key arguments for not using savings to pay off debt is the importance of maintaining emergency savings. An emergency fund — typically three to six months’ worth of living expenses — provides a crucial financial cushion in the event of job loss, unexpected medical bills, or an urgent car or home repair. Without that buffer, you might be forced to run up high-interest credit card debt to get by, negating the benefits of having paid off previous debt.

💡 Quick Tip: Everyone’s talking about capping credit card interest rates. But it’s easy to swap high-interest debt for a lower-interest personal loan. SoFi credit card consolidation loans are so popular because they’re cheaper, safer, and more transparent.

Opportunity Cost of Using Savings

Using your savings to pay off debt means missing out on the opportunity to invest that money or let it earn interest in a high-yield savings account. This is especially relevant with low-interest debt, such as federal student loans, certain car loans, or mortgage balances. If you could earn more interest or investment returns than what you’re paying on your debt, paying off the debt early could potentially cost you money in the long run.

Every financial decision has an opportunity cost. It’s important to consider whether your money might be better utilized elsewhere.

When to Prioritize Paying Off Debt

In some situations, however, it could make sense to pay off debt rather than save money. Here are some scenarios where you may want to use your savings to pay off debt.

High-Interest Debt

Credit card debt is notorious for high interest rates. As of May 2025, the average credit card annual percentage rate (APR) was 22.25% Given the steep cost of these debts, it can be smart to prioritize paying off credit card debt over saving. The interest accruing can quickly outpace any gains from savings or investing, so tackling high-interest debt should usually be a top priority.

Source of Stress

Debt isn’t just a financial burden; it’s often an emotional one too. If your debt causes anxiety, sleep loss, or tension in your relationships, that emotional toll is worth considering. Prioritizing debt repayment to relieve stress and improve mental well-being can be just as valuable as financial gains.

Limiting Financial Flexibility

High debt payments can limit your cash flow and force you to delay important life goals, like owning a home, getting married, going back to school, or starting a family. For example, a high debt-to-income ratio can hinder your ability to qualify for favorable mortgage rates or even a mortgage at all. By paying off debt, you free up money in your budget that can later be redirected towards other goals.

When to Prioritize Saving

While paying down debt is important, there are also compelling reasons to focus on building your savings, especially if your debt isn’t urgent or costly.

Low-Interest Debt

If your debt comes with a relatively low interest rate, there may be less urgency to pay it off early. For example, if your mortgage has a 3.5% interest rate, and your retirement investments earn an average of 7%, you’re likely better off contributing to your retirement than accelerating debt payments.

In these cases, the debt is manageable and might even come with tax advantages. This gives you room to prioritize saving and investing instead.

Access to 401(k) Employer Match

If your employer offers a 401(k) match and you’re not contributing enough to get the full match, you’re essentially leaving free money on the table. A 100% match up to 6% of your salary, for example, is an immediate 100% return on investment. That’s far more than you’d save by paying off most debts faster.

In nearly every case, it makes sense to contribute enough to receive the full match before prioritizing additional debt payments.

No Emergency Savings

If you don’t have an emergency fund, it’s wise to build one before aggressively attacking your debt. Without savings, you’re vulnerable to any financial disruption, which could force you into more debt. Establishing a modest emergency fund — say $500 to $1,000 to start — can prevent future financial setbacks and give you some breathing room.

How to Start Paying Off Debt Without Dipping Into Your Savings

You don’t necessarily need to choose between savings and debt repayment — you can do both. Here’s how to get started on your debt without draining your savings account.

Make a Budget

Creating a budget is a crucial step towards effectively paying off debt — and the process is easier than it sounds. Simply gather the last several months of financial statements and use them to calculate your average monthly income and spending.

If you find that, on average, your spending is close to (or higher) than your earnings, you’ll want to find places to cut back. First look for monthly expenses you can cut completely, such as steaming services you rarely watch or membership to a gym you rarely use. Then consider ways to trim discretionary spending, such as eating out less, avoiding impulse purchases, and finding cheaper entertainment options. Any funds you free up can then be funneled towards debt repayment.

Establish a Debt Payoff Strategy

“Focus on paying off one debt at a time,” advises Brian Walsh, CFP® and Head of Advice & Planning at SoFi. “If you spread your money out over many debt payments, your progress may not be as fast as you want. But by focusing on one goal at a time, you can see success sooner, and that can keep your motivation up.”

Two popular debt paydown strategies to consider:

•   Debt snowball: With this approach, you put extra money towards the debt with the smallest balance, while making minimum payments on all the other debts. When that debt is paid off, you move to the next-smalled debt, and so on until all debts are paid off. This method can deliver early wins and help keep you motivated to continue tackling your debt.

•   Debt avalanche: Here, you put extra money towards the debt with the highest interest rate, while paying the minimum on the rest. When that debt is paid off, you move on to the debt with the next-highest rate, and so on. This strategy helps minimize the amount of interest you pay, which can help you save money in the long term.

Consider Debt Consolidation

If you have multiple high-interest debts, you might consider using a personal loan to pay off your balances, a payoff strategy known as debt consolidation. Personal loans for debt consolidation typically have fixed interest rates, so your payments remain the same for the term of the loan. Rates also tend to be lower than credit cards. In addition, debt consolidating simplifies repayment by rolling multiple payments into one.

However, debt consolidation generally only makes sense if you can qualify for a rate that’s lower than what you’re currently paying on your debt balances. Before going this route, it’s helpful to use an online debt consolidation calculator to see exactly how much you can save by consolidating debt with a personal loan.

💡 Quick Tip: Before choosing a personal loan, ask about the lender’s fees: origination, prepayment, late fees, etc. One question can save you many dollars.

Look Into Balance Transfer

Another way to pay down credit card debt faster is by doing a balance transfer. This strategy involves moving debt from one or more credit cards to another, ideally with a lower or 0% introductory interest rate. This temporary reduction in the APR allows more of your monthly payments to go towards the principal, helping you pay down debt faster and potentially saving you money on interest charges.

Just keep in mind that if you can’t pay off your balance during the promotional period, you’ll be back to paying high rates again. Also these cards often charge a transfer fee, typically 3% to 5% of the transferred amount, which adds to your costs.

The Takeaway

So should you pay off debt or save money? The answer is that it depends. If you have at least a starter emergency fund and high-interest debt, it may make sense to prioritize paying your balances down, either through an avalanche or snowball plan, debt consolidation, or a balance transfer.

However, if you have debt with a very low interest rate, access to an employer 401(k) match program, and/or no emergency savings, you may want to prioritize savings over debt repayment.

Ultimately, the smartest path forward often involves doing both: saving and paying down debt in tandem, based on your individual situation and future goals. This hybrid strategy can help put you on a path to long-term financial health.

Whether or not you agree that credit card interest rates should be capped, one thing is undeniable: Credit cards are keeping people in debt because the math is stacked against you. If you’re carrying a balance of $5,000 or more on a high-interest credit card, consider a SoFi Personal Loan instead. SoFi offers lower fixed rates and same-day funding for qualified applicants. See your rate in minutes.

FAQ

Why is it risky to use savings to pay off debt?

Using savings to pay off debt can be risky because it leaves you without a financial cushion for emergencies. If unexpected expenses arise, like a medical bill or car repair, you may need to rely on high-interest credit again, putting you back in debt. Also if your savings are in a high-yield account or investment, withdrawing them could mean missing out on compound interest and future growth. It’s important to weigh the long-term impact before using savings to eliminate debt.

Which debt should I pay off first?

It’s generally best to start with high-interest debt, like credit cards, because they cost you the most over time. This strategy, known as the “avalanche method,” can reduce the total interest you’ll pay. Alternatively, you might choose to pay off the smallest balances first. Known as the “snowball method,” this approach provides quick wins, which can help boost motivation. The best game plan for you will depend on your personality and financial goals.

How much should I have saved?

A good rule of thumb is to have three to six months’ worth of living expenses saved in an emergency fund. This provides a safety net in case of job loss, medical emergencies, or unexpected costs. Your exact savings goal may vary based on your income stability, family size, and existing obligations. If you’re just starting out, aim for at least $1,000 to cover small emergencies, then build toward a more substantial reserve while balancing other financial goals like debt repayment.

Are personal loans a good alternative to using savings?

Personal loans can be a viable alternative to using savings to pay down debt, especially if you can secure a lower interest rate than your current debt carries. However, loans add to your overall debt load and come with fees and interest. Using savings avoids interest, but could leave you vulnerable if emergencies arise, so it’s important to weigh your options carefully.

How do I balance saving and paying off debt at the same time?

Balancing saving and debt repayment involves setting clear priorities and budgeting effectively. Start by building a small emergency fund (e.g., $500-$1,000) while making minimum payments on all debts. Then, focus on aggressively paying down high-interest debt while still contributing modestly to savings. Once high-interest debt is reduced, you can shift more income toward savings. The goal is to avoid future debt by preparing for emergencies and long-term financial goals.

Should I use my savings to pay off credit card debt?

Using savings to pay off credit card debt can make sense if the debt carries high interest and your savings exceed your emergency needs. Since credit cards often charge upwards of 20% interest, paying them off can save you money long term. However, you should keep a basic emergency fund — typically $1,000 or more — so you don’t fall back into debt when unexpected expenses arise. If your savings are limited, consider a blended approach — pay down some debt while maintaining a small safety net.

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The primary differences between investing and speculating are the degree of risk and the time frame involved. Investing is typically a longer-term strategy that involves less risk than speculating — which is a short-term, high-risk approach to profiting from quick changes in price.

Whether you’re interested in investing or speculating can also determine the types of assets you might invest in, as well as the strategies you might use.

Defining Investing and Speculation

Speculating usually describes scenarios when there’s a high chance the investment will deliver losses, but also cases where the investment could result in a high profit. High-risk, potentially high-reward investments may include commodities, derivatives, futures, and more.

In contrast, investing generally refers to transactions where an individual has researched an asset, and puts money into it with the hope that prices will rise over time.

There are no guarantees, of course, and all types of investing include some form of risk. Individuals may find ways to speculate or invest with an online investing platform or through a regular broker.

Examples of Investments and Speculative Investments

Assets that are thought of as more traditional types of investments include publicly traded stocks, mutual funds, exchange-traded funds (ETFs), bonds (e.g. U.S. Treasurys, municipal bonds, high-grade corporate bonds), and real estate.

Even some so-called alternative investments would be considered more long-term and less speculative: e.g., jewelry, art, collectibles.

Assets that are almost always considered speculative include: junk bonds, options, futures, forex and foreign currencies, and investments in startup companies.

Sometimes it isn’t as simple as saying that all investments in the stock market, or types of ETFs or mutual funds, hold the same amount of risk, or are definitely classified as investments. Even within certain asset classes, there can be large variations in risk exposure.

The Traditional Approach to Investing

When it comes to the more traditional approach to investing, individuals typically buy and hold assets in their investment portfolios or retirement accounts (e.g., when they open an IRA), with the aim of seeing long-term gains.

Traditional forms of investing focus on the performance of the underlying business or organization, not on the day-to-day or hour-by-hour price movements of an asset — which is more common with speculation.

For this reason, some traditional investors tend to rely on various forms of analysis (e.g., the fundamental analysis of stocks), as well as analytical tools and metrics to gauge the health of a company, asset, or market sector.
Recommended: Stock Market Basics

Speculation: A High-Risk, High-Reward Game

The difference between speculating and investing can be nuanced and a matter of opinion. (After all, some investors view investing in stocks as a form of gambling.) But when traders are speculating, they are typically seeking profits in a relatively short period of time: e.g., hours, days, or weeks.

In the case of commodities or futures trading, the time horizon might be longer, but the aim of making a big profit fairly quickly is at the heart of most speculation.

Speculators may also use leverage, a.k.a. margin trading, to boost their buying power and amplify gains where possible (although using leverage can also lead to steep losses).

The Psychology of Investing vs Speculating

The psychology of a typical investor is quite different from that of a speculative investor, and again revolves around the higher tolerance for risk in pursuit of a potentially bigger reward in a very short time frame.

Historical Perspectives on Investing and Speculation

The history of investing and speculating has long been entwined. In the earliest days of trading thousands of years ago, most markets were focused on the exchange of tangible commodities like livestock, grain, etc.

That said, some investors might put their money into global voyages or even wars with the hope of acquiring great wealth. Although the time frame for these investments was long-term, the risk of loss was very high. Thus, many early investors could be described as speculators.

Investing in forms of debt as a way to make money was also common, eventually leading to the bond market as we know it today.

The concept of investing in companies and focusing on longer-term gains took hold gradually. As markets became more sophisticated over the centuries, and a wider range of technologies, strategies, and financial products came into use, the division between investing and speculating became more distinct.

Recommended: What Causes a Stock Market Bubble?

Speculation History: Notable Market Bubbles and Crashes

The history of investing is rife with market bubbles, manias, and crashes. While the speculative market around tulip bulbs in 17th-century Holland is one extreme example, there have been many similar financial events in just the last 20 or 30 years — including the dot-com bubble and the Great Financial Crisis of 2008-09. Most of these were driven by speculation.

What marks a bubble is a well-established series of stages driven by investor emotions like exuberance (i.e., greed) followed by panic and loss. That’s because many investors tend to be irrational, especially when in pursuit of a quick profit that seems like “a sure thing.”

Some classic examples of financial bubbles that changed the course of history:

•   The South Sea Bubble (U.K., 1711 to 1720) — The South Sea company was created in 1711 to help reduce national war debt. The company stock peaked in 1720 and then crashed, taking with it the fortunes of many.

•   The Roaring Twenties (U.S., 1924 to 1929) — The 1920s saw a rapid expansion of the U.S. economy, thanks to both corporations’ and consumers’ growing use of credit. Stock market speculation reached a peak in 1929, followed by the infamous crash, and the Great Depression.

•   Japanese Bubble Economy (1984 to 1989) — The Japanese economy experienced a historic two-decade period of growth beginning in the 1960s, that was further fueled by financial deregulation and widespread speculation that artificially inflated the worth of many corporations and land values. By late 1989, as the government raised interest rates, the economy fell into a prolonged slowdown that took years to recover from.

•   Dot-Com Bubble (1995 to 2002) — Sparked by rapid internet adoption, the dot-com boom and bust saw the growth of tech companies in the late 1990s, when the Nasdaq rose 800%. But by October 2002 it had fallen 78% from that high mark.

Key Differences Between Investing and Speculating

What can be confusing for some investors is that there is an overlap between investing in the traditional sense, and speculative investing in higher-risk instruments. And some types of investing fall into the gray area between the two.

For example, options trading, commodities trading, or buying IPO stock are considered high-risk endeavors that should be reserved for more experienced investors. What makes these types of investments more speculative, again, is the shorter time frame and the overall risk level.

Time Horizon: Long-term Goals vs Quick Gains

As noted above, investors typically take a longer view and invest for a longer time frame; speculators seek quick-turn profits within a shorter period.

That’s because more traditional investors are inclined to seek profits over time, based on the quality of their investments. This strategy at its core is a way of managing risk in order to maximize potential gains.

Speculators are more aggressive: They’re geared toward quick profits, using a single strategy or asset to deliver an outsized gain — with a willingness to accept a much higher risk factor, and the potential for steep losses.

Fundamental Analysis vs. Market Timing

As a result of these two different mindsets, investors and speculators utilize different means of achieving their ends.

Investors focused on more traditional strategies might use tools like fundamental analysis to gauge the worthiness of an investment.

Speculators don’t necessarily base their choices on the quality of a certain asset. They’re more interested in the technical analysis of securities that will help them predict and, ideally, profit from short-term price movements. While buy-and-hold investors focus on time in the market, speculators are looking to time the market.

Real-World Implications of Investment vs Speculation

To better understand the respective value and impact of investing vs. speculating, it helps to consider the real-world implications of each strategy.

The Impact of Speculation on Markets

It’s important to remember that speculation occurs in many if not all market sectors. So speculation isn’t bad, nor does it always add to volatility — although in certain circumstances it can.

For example, some point to IPO shares as an example of how speculative investors, who are looking for quick profits, may help fuel the volatility of IPO stock.

Speculation does add liquidity to the markets, though, which facilitates trading. And speculative investors often inject cash into companies that need it, which provides a vital function in the economy.

Strategic Approaches to Investment

Whether an investor chooses a more traditional route or a more speculative one, or a combination of these strategies, comes down to that person’s skill, goals, and ability to tolerate risk.

Diversification and Asset Allocation

For more traditional, longer-term investors, there are two main tools in their toolkit that help manage risk over time.

•   Diversification is the practice of investing in more than one asset class, and also diversifying within that asset class. Studies have shown that by diversifying the assets in your portfolio, you may offset a certain amount of investment risk and potentially improve returns.

•   Asset allocation is the practice of balancing a portfolio between more aggressive and more conservative holdings, also with the aim of growth while managing risk.

When Does Speculation Make Sense?

Speculation makes sense for a certain type of investor, with a certain level of experience and risk profile. It’s not so much that speculative investing always makes sense in Cases A, B, or C. It’s more about an investor mastering certain speculative strategies to the degree that they feel comfortable with the level of risk they’re taking on.

The Takeaway

The main way to differentiate between investment and speculation is through the lens of risk exposure. If an asset is purchased that carries a reasonable probability of profit over time without significant risk, it’s an investment. If an asset carries a higher likelihood of significant fluctuation and volatility in a short period of time, it is speculation.

A long-term commitment to a broad stock market investment, like an equity-based index fund, is generally considered an investment. Historical data shows us that the likelihood of seeing gains over long periods, like 20 years or more, is reasonable — although there is always the risk of loss.

Compare that with a trader who purchases a single stock with the expectation that the price will surge that very day or week — which is far more difficult to predict and has a much lower probability of success.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.

FAQ

Is speculation the same as gambling?

Not exactly. Gambling involves placing a bet or wager on a certain event or outcome, with the hope of winning money. Speculation involves some skill and the use of technical analysis in order to make a profit. But both involve the risk of total loss.

What is the psychology of investing vs speculating?

An investment mindset tends to be more risk-averse and focused on long-term goals. The psychology of a speculator tends to be comfortable with risk in order to use short-term strategies that may or may not be profitable.

What are the tools for investing vs speculating?

Investors often use fundamental analysis tools to gauge the health of a business. Speculators use different forms of technical and trend analysis to take advantage of price movements.