If debt balances and interest charges have become overwhelming, you have options. A balance transfer or debt consolidation loan could save you money or help you get out of debt sooner. When choosing between them, youll want to consider how much debt you have, the offers you get from creditors, and how long you may need to pay off the balance. Both may be viable choices, but sometimes one will be better than the other.
If you’re struggling with high-interest debt, you’re probably looking for ways to pay it off faster and reduce the amount of interest you’re paying. Two common options are getting a debt consolidation loan or doing a balance transfer to a 0% APR credit card. But how do you decide which is the better choice for your situation?
I’ve been researching debt relief options for my personal finance blog lately. Based on what I’ve learned, there are pros and cons to both debt consolidation loans and balance transfers. Here are some key factors to consider when choosing between the two.
The Type of Debt You Have
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Debt consolidation loans allow you to consolidate any type of unsecured debt like credit cards medical bills payday loans, etc. They can help simplify multiple payments.
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Balance transfers only let you move credit card balances from one card to another They don’t work for other debt types
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If you only have credit card debt, a balance transfer may be your better option to save on interest. If you have different debt types, consider a consolidation loan.
Your Credit Score
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To get approved for a balance transfer card, you’ll generally need good to excellent credit – a FICO score of 690 or higher
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Debt consolidation loans are available to a wider range of credit scores. Some lenders work with fair credit scores around 580.
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Check your credit before applying. If it’s fair or poor, you may have better odds with a consolidation loan.
Amount of Debt
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Balance transfer cards often have lower credit limits ($5,000 or less). They work best for smaller credit card balances.
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Debt consolidation loans offer higher loan amounts, like $50,000+. This allows you to consolidate larger debts.
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Look at your total debts. A balance transfer card may not provide a high enough limit if you have over $10,000 in credit card balances.
Interest Rates and Fees
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Balance transfer cards offer 0% intro APR for 12-21 months. But they charge a one-time balance transfer fee of 3-5%.
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Debt consolidation loans have higher interest rates like 6-36% APR. Some lenders charge origination fees of 1-10%.
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Run the numbers to see potential interest savings with each option after fees.
Time Frame for Payoff
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To benefit from 0% on a balance transfer, you need to pay off your debt before the intro period ends.
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Debt consolidation loans give you 1-7 years to repay. This allows more time for larger debts.
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Make sure you can pay off a balance transfer in the intro period. If not, a longer-term consolidation loan may work better.
Impact on Credit Scores
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Balance transfers don’t require a hard inquiry, so they won’t hurt your credit if done properly. Too many applications could have a minor impact.
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Taking out a consolidation loan does require a hard credit check, which can ding your score a few points initially. But it could help scores over time by lowering your credit utilization.
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Be aware of any short-term score impacts. The long-term benefits of debt consolidation often outweigh them.
Ongoing Use of Credit Cards
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If you do a balance transfer but continue charging on your old cards, it defeats the purpose. You could end up with new credit card debt again.
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Taking out a consolidation loan may help curb reliance on credit cards since you have just one monthly payment instead of multiples.
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Be cautious about running up card balances again after consolidating debt. Doing so could put you deeper in debt. Monitor spending carefully.
Flexibility in Repayment
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Balance transfers lock you into fixed monthly payments on the credit card for its payoff period. You can’t adjust the payments.
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Many lenders allow you to choose your ideal repayment timeline for a debt consolidation loan anywhere from 2-7 years. Gives you flexibility.
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Figure out the monthly payment you can manage and how quickly you want to be debt-free. Compare options.
Opportunities to Save on Interest
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Balance transfers offer a 0% intro APR for a set period, allowing you to save substantially on interest during that time.
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Debt consolidation loans charge interest from the start, but it may still be lower than the combined APRs on all your debts. You can save over the loan’s term.
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Run the numbers to see which can offer more interest savings based on your specific situation.
Post-Repayment Benefits
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Paying off a credit card balance can help improve your credit utilization ratio, a key factor in credit scores.
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Debt consolidation loans don’t directly help credit utilization, but they can still help strengthen your credit history by adding another type of installment loan to your credit mix.
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Both options can set you up for credit score improvements after repaying consolidated debts, which saves money long-term.
The Bottom Line
Choosing between a balance transfer card and a debt consolidation loan requires looking at your specific financial situation – the amount and types of debt you have, your income, credit score and more.
I’d recommend starting by pulling your credit reports so you know exactly what debts you’re dealing with. Then use a debt payoff calculator to estimate potential interest savings with a 0% balance transfer card versus a personal loan so you can compare options.
Whichever debt relief option you choose, make sure you develop a solid monthly budget and keep a close eye on spending habits afterwards so you don’t end up deeper in debt. Consolidating debts can provide a clean slate financially, if you stick to a plan for staying out of debt after you’ve paid off your consolidated balance or loan.
Balance Transfer Pros and Cons
- Intro 0% APR offers can save you money. You may be able to move debt to a credit card with an intro 0% APR and avoid paying any additional interest during that time.
- The card may have other benefits. While you generally wont earn rewards on transferred balances, many cards earn rewards on purchases. Some cards also have intro 0% APR offers on purchases, which could be a good fit if you need to make purchases and consolidate debts. If your cards 0% intro APR only applies to balance transfers, avoid using it to buy things until after you pay off the transferred balances.
- Cards can have high standard APRs. Once the promotional period ends, any remaining balance will accrue interest at the cards standard APR, which could be high.
- Balance transfer fees are common. Many card issuers charge a balance transfer fee of around 3% to 5% of the amounts you transfer to the card.
- You wont know the credit limit youll be offered. Your credit cards balance, including transferred balances and fees, cant go above your cards credit limit. However, you wont know the limit until after you open the new card.
- Applying can hurt your credit. Each credit card application you submit can lead to a hard inquiry, which can hurt your credit scores whether the card issuer approves or denies your application.
- Credit card companies may have restrictions. Credit card companies might not let you transfer balances between their cards. If you want to transfer credit card balances, look for offers from different card issuers.
What Is a Balance Transfer?
A balance transfer generally refers to when existing debt is transferred to a credit card. You may be able to do this by moving a credit card balance from one card to another or by transferring money from your credit card to a bank account and then using the money to pay down debt.
Credit card issuers often use promotional balance transfer offers to entice new cardholders, although you may also occasionally receive balance transfer offers on the cards you already have open.
A balance transfer could help you save money if you receive a low promotional annual percentage rate (APR) on the amount transferred.
BALANCE TRANSFER v. DEBT CONSOLIDATION LOAN – are any right for you?
FAQ
Is it better to do a balance transfer or debt consolidation?
Is it best to do a balance transfer or personal loan?
What is a disadvantage of debt consolidation?
What is the downside of a balance transfer?
What should you consider when comparing credit cards & debt consolidation loans?
Interest rates are the first — and probably most important — thing to look at when comparing credit cards and debt consolidation loans. Balance transfer credit cards offer an interest-free period upfront, but rates after the introductory period are generally higher than interest rates on personal loans.
Can a balance transfer card be a debt consolidation loan?
Balance transfer cards and debt consolidation loans have different qualification criteria, though both look at your overall credit, so check your credit score before applying. Borrowers with good to excellent credit (690 score or higher) may qualify for both a balance transfer card and a debt consolidation loan.
What is a debt consolidation loan?
Debt consolidation loans are personal loans used to help people manage their debts. These loans are offered by banks, credit unions and online lenders. This new loan is used to pay off all of your existing debts, like credit cards or medical bills. Instead of juggling several payments, you consolidate them into one.
How much does a balance transfer loan cost?
This is an upfront fee that ranges from 1% to 10% of the loan amount. Keep in mind that even with these fees, a balance transfer card or debt consolidation loan may have a lower APR than your current debts, so you can still save money. Best for paying off credit card debt only.