While debt consolidation loans work well for paying down large amounts of debt, balance transfer credit cards can help you save even more money if you can pay off your debt within the promotional period. While both balance transfer credit cards and debt consolidation loans can help you pay down your debt, your own personal financial situation and your commitment to paying down your debt will determine which is the right option for you.
Compare debt consolidation loans and balance transfer credit cards
Usually come with lower APRs than your original debts — you can sometimes find APRs as low as 4%.
Sometimes come with origination fees, usually between 1% and 3% of your loan amount. Lenders typically deduct the origination fee from your loan amount before you receive your funds, so make sure to ask for enough to cover your debts and the origination fee when applying.
Balance transfer credit card
A balance transfer credit card is another method of moving all of your debts into one place. Once you sign up for a balance transfer credit card, your credit card provider pays off the balances of your debts, which can include credit cards, personal loans and more. Then you make repayments on the balance transfer credit card.
Balance transfer credit cards:
Often come with 0% or low APR introductory rates, meaning that you don’t have to pay interest or fees for the first 6 to 15 months, depending on the balance transfer offer. This introductory rate allows you to save big on interest if you can pay off all or most of your debt in that time frame.
Many balance transfer cards often charge a transfer fee, which is usually 1% to 5% of the total transfer amount.
When is a debt consolidation loan better?
Debt consolidation loans are often better when…
You have a large amount of debt. Balance transfer credit cards come with credit limits, so you might not be able to fit all of your debts on to one.
You can’t afford to repay your debt quickly. Debt consolidation loans give you more time to pay off your debt at a lower interest rate than balance transfer credit cards do — meaning more affordable monthly repayments.
You’re willing to put up collateral. If you apply for a secured debt consolidation loan, you can get even lower rates by using an asset as collateral.
You have bad credit. Qualifying for a competitive balance transfer credit card offer can be difficult when you have a low credit score. You might have more success with a secured personal loan, which is generally a less expensive option for bad credit borrowers.
When is a balance transfer credit card the better option?
A balance transfer credit card might be a better option when…
You can afford to pay off your debt fast. If you can pay off your debt within the introductory period, you can save more with a balance transfer credit card than with a debt consolidation loan.
You’re consolidating credit card debt only. Balance transfer cards make the process seamless to pay off credit card balances from other providers. Even though you can use a personal loan to consolidate credit card debt, you might find it simpler to transfer the debt to a new credit card.
You’re willing to spend the time applying for new cards. Even if you aren’t able to repay your debt by the time your introductory period is over, you can always apply for a new balance transfer credit card and start all over again. Keep in mind that you need to maintain a good enough credit rating to qualify for a new balance transfer card.
4 questions to ask when weighing your options
Ask yourself the following questions to decide which is better for your financial situation:
How much debt do I have? Debt consolidation loans pack the biggest punch for large amounts of debt. Balance transfer credit cards are generally better for smaller amounts, due to credit limits and shorter 0% or low interest introductory periods.
How much can I afford to pay each month? Debt consolidation loans typically come with longer terms than balance transfer credit cards, making monthly repayments lower, while balance transfer credit cards can motivate you to get out of debt quicker.
How’s my credit score? While you need good credit to qualify for competitive rates and terms with both balance transfer credit cards and debt consolidation loans, there are more options for people with bad credit in the debt consolidation loan space.
Do I want another credit card? Balance transfer credit cards only come with minimum monthly payments, which means you don’t actually have to pay the balance off in full each month. However, debt consolidation loans do that work for you — giving you one less thing to worry about.
Mindy gets out of debt
During university, Mindy’s bills started becoming more and more difficult to keep track of. Her total debt added up to $11,000 with an average APR of 15%. She had an excellent credit score — around 800 — and expected to qualify for most loans.
She applied to get pre-approved for a balance transfer credit card and a personal loan that could be used for debt consolidation. Here’s how the offers compared:
Debt consolidation loan
Balance transfer credit card
Time to pay off debt
12-month introductory period
Loan amount/credit limit
0% for introductory period, 18% after
$953.33 to pay off debt before intro period ends
No upfront fee
Balance transfer fee of 4% ($440)
Total interest and fees
Although the balance transfer credit card was less expensive in the long run, Mindy couldn’t afford to pay over $950 a month toward her debt and didn’t want to apply for another balance transfer credit card in a year’s time. Because of this, she opted for a debt consolidation loan instead.
If she could have paid $950 a month toward her debt, she would have saved just over $600.
If done right, both debt consolidation loans and balance transfer credit cards can help you organize and pay down your debt, while saving on interest charges. Debt consolidation loans are generally better for people with large amounts of debt that don’t mind paying a little more in the long run for lower monthly payments. Balance transfer credit cards are often best for organizing a small amount of debt that you can afford to pay off over a short period of time.
Frequently asked questions
Taking out either a debt consolidation loan or a balance transfer credit card has a similar effect on your credit score.
Both involve a hard credit inquiry, which can cause your credit score to dip temporarily.
If you’re able to repay your debts quickly and on time, both can improve your credit in the long run.
You can, but keep in mind that the introductory rate on balance transfer credit cards usually only applies to the transferred amount, and not new purchases. New purchases will likely incur an APR of 21.99%, with some as high as 26%.
You might want to look into debt relief — starting with credit counselling — or even bankruptcy if your debt has become too much for debt consolidation or a balance transfer credit card.
Anna Serio is a trusted lending expert and certified Commercial Loan Officer who's published more than 1,000 articles on Finder to help Americans strengthen their financial literacy. A former editor of a newspaper in Beirut, Anna writes about personal, student, business and car loans. Today, digital publications like Business Insider, CNBC and the Simple Dollar feature her professional commentary, and she earned an Expert Contributor in Finance badge from review site Best Company in 2020.
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