Updated: March 21, 2024
Updated: March 21, 2024
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If you're feeling weighed down by growing debts and seeking a break from high interest charges, two popular strategies are available to help you: balance transfers and debt consolidation. Both options can help you consolidate debt and lower your payments by saving on interest.
Balance transfers work by shifting your debt from one or more credit cards to another, typically a new card offering a low-to-0% interest rate during an introductory period. Some cards even allow balance transfers from non-credit card debts. This approach can reduce the amount of interest you pay and simplify your payments into one account.
Debt consolidation combines multiple debts into a single loan. This process simplifies your payments to just one monthly due date and often provides a lower interest rate than your current debts, and payments are spread out over a longer period of time. Consolidation loans are less risky than balance transfers since you’ll pay a fixed amount at a fixed rate for the duration of the loan. Balance transfer cards charge a higher rate after the introductory period.
Choosing between the two involves considering certain factors such as type of debt, interest rates, your credit score or the amount of debt you will consolidate. Each has pros and cons, which can make one more suited to you than the other.
Comparison Areas | Balance Transfer Credit Cards | Debt Consolidation Loans |
|---|---|---|
Interest rates | Usually start with a low or 0% introductory APR for a set period, often 12–18 months, with some cards offering 21 months. Rates increase afterward. | Fixed or variable rates — often lower than those for credit cards. |
Fees | Usually between 3%–5% or a fixed fee whichever is higher — some cards offer 0% balance transfer fee. | Origination fees typically range from 1%–6% of the loan amount. Not all lenders charge this fee. |
Debt Amount | Less than $5,000 | $1,000 to $100,000 |
Repayment Term | Flexible terms, but only minimum payments are required. Full APR applies to unpaid balances after the introductory period ends. | Fixed repayment terms, ranging from 2 to 7 years. Monthly payments are fixed and stable. |
Credit Impact | One hard inquiry per new application, but acquiring more credit could improve your credit utilization ratio. | Applying for multiple loans may result in several hard inquiries, temporarily lowering your credit score. Inquiries for the same type of credit made between 14–45 days are considered as one inquiry. |
Eligible Debt Types | Primarily for consolidating credit card debt but possible to consolidate other debts. | Versatile — can consolidate credit card debt, medical bills, auto loans and more, depending on the lender. |
Credit Needed | Requires good to excellent credit if you want to get a good APR and/or longer introductory 0% durations. | Generally requires good to excellent credit, verifiable income and a low debt-to-income ratio; However, loans for poor credit are also available. |
Time to receive fund or time balance transfer is reflected | Usually between 2 days to 3 weeks, possibly longer, once the application for a balance transfer card is approved. | Some lenders offer same-day up to 2 days upon approval of the loan. |
Balance transfer credit cards are useful for consolidating high-interest or multiple debts into one and simplifying the payment process, whereas debt consolidation loans offer a structured approach to managing various debts, often with lower rates, longer repayment periods and the potential for flexible terms. However, both options come with their respective advantages and drawbacks.
Balance Transfer Credit Card | Debt Consolidation Loan | |
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PROS |
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CONS |
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For both balance transfer cards and debt consolidation loans, you’ll need to submit an application online or in person, including personal and financial information.
Although it's generally easier and quicker to apply for a balance transfer card, keep in mind that approval largely depends on your credit score and history. On the other hand, applying for a debt consolidation loan can be a more detailed process, often requiring proof of income and other documentation.
However, this option might offer a higher likelihood of approval for individuals with diverse sources of income or those who can secure the loan with collateral. Remember, both applications will likely involve a hard credit check, which can cause your credit score to dip temporarily.
Some consumers transfer balances repeatedly to take advantage of multiple 0% intro APR offers, rather than a debt consolidation loan, as they pay down their debt. While this strategy can work for some, it is risky because there's no guarantee that you'll be approved for the next 0% intro APR offer. If you fail to qualify, you'll be stuck with a balance on another high-interest rate card. — Lee Huffman, credit card expert at BaldThoughts.com
Both balance transfer cards and debt consolidation loans can be effective for managing debt. Your personal circumstances and financial goals will decide which is the better strategy for you. Here are questions you should ask when deciding what to go for:
How much debt do you need to pay down?
Balance transfer cards are well-suited for consolidating smaller debts that you can repay within the introductory time frame. Debt consolidation loans are designed to handle larger debt amounts, often ranging from $1,000 to $100,000, and they offer extended repayment periods that can reach up to five years (although a seven-year payment period is also available). If you have a substantial amount of debt, you might want to consider a debt consolidation loan.
What type of debt do you need to consolidate?
A balance transfer card is an excellent choice for consolidating high-interest credit card debt, although some card issuers accept non-credit card debts. However, if you're dealing with a variety of unsecured debts — such as medical bills and personal loans — a debt consolidation loan might be more suitable.
Can you pay them off within the given time period?
Balance transfer cards are a good choice if you can pay off your debt during the 0% APR period. But when this period ends, the interest rate could get much higher, between 18% to 29.99%. Debt consolidation loans, on the other hand, have an interest rate that stays the same and starts adding up right away.
What credit score do you have?
Generally, good or excellent credit scores are needed to qualify for a balance transfer card. Lenders, on the other hand, might offer debt consolidation loans to individuals with lower credit scores, although at higher interest rates.
How much in fees do I need to pay?
There are fees associated with both methods. Most balance transfer cards have fees ranging between 3% and 5% of the amount you're transferring. Debt consolidation loan origination fees may cost anywhere from 1% to 10% of the loan amount, depending on your credit score.
Likewise, some debt consolidation loans charge a fee if you try to pay them early.
Although both likely offer a simpler payment plan than you currently have, one may be better for you than the other.
Choose Balance Transfer If:
Choose Debt Consolidation If:
If you’re still unsure about which path to take, we’ve got a quiz to help you come up with the best strategy.
Are you wondering how to handle your debt effectively? Take this quick quiz to find out whether you should consider a balance transfer, debt consolidation loan or another approach.
1. How much debt do you need to pay down?
A) Less than $5,000
B) Between $5,000 and $15,000
C) More than $15,000
2. What types of debts are you looking to consolidate?
A) Just credit card debt
B) A mix of credit card debt and personal loans
C) Various debts including credit cards, personal loans, and student loans
3. What's your credit score like?
A) Excellent (720 and above)
B) Good (680 to 719)
C) Fair or below (below 680)
4. Which answer best describes your financial situation?
A) I have a stable income with some extra cash each month
B) My income varies month to month, but I generally break even
C) I often find myself short at the end of the month
5. Do you have the support and systems in place to work down debt quickly?
A) Yes, I can focus and have a good support system
B) Maybe, but I would need some guidance
C) No, I struggle to stay on top of my current payments
QUIZ RESULTS
Mostly A's: Explore a Balance Transfer Card
You seem to have a manageable level of debt and a good credit score, making you a prime candidate for a balance transfer. This could be a great short-term solution to reduce your interest and pay down debt quickly.
Mostly B's: Consider a Debt Management Plan
Your situation is a bit complex, with varying income and different types of debt. A structured debt management plan could offer the guidance and framework you need to steadily work off your debt.
Mostly C's: Debt Consolidation Loan Could Be the Way to Go
Given the higher level of debt and a more challenging financial situation, a debt consolidation loan might be your best bet. It can simplify your payments and potentially lower your interest rate, making it easier to manage your debt in the long run.
If you're still unsure: Consult with a credit counselor to get more specific advice for your situation.
Balance Transfer Card: If you’ve decided that a balance transfer is the better option for you, the next step would be to select the best balance transfer credit card to fit your needs. There are a couple of factors to consider when selecting a balance transfer card, such as your credit score and introductory APR and duration.
Most credit cards have an average introductory period of 15 months, but you may require a longer period, say 18 months, to pay it off completely. Or you may want to have a balance transfer credit card that gives you cash back on subsequent purchases during an intro APR period, such as the Discover it Balance Transfer Card or the Citi Double Cash Card.
A balance transfer usually takes two days to six weeks to complete. To avoid late payment fees and penalties, keep up with at least the minimum payments on your current card to prevent late charges and potential harm to your credit rating.
Debt Consolidation Loan: If a debt consolidation loan is better for your current financial situation, start by listing all your debts, like credit cards and loans, noting down their amounts and interest rates so you’ll know how much you need to pay. Work out a monthly payment you can afford and shop around for the best rates and lenders available.
We address some of the most common questions about the topic to help you make an informed decision.
Both options, if managed correctly, can positively affect your credit score over time by reducing your credit utilization ratio and demonstrating consistent on-time payments. However, the initial application for either can create a hard inquiry, causing a temporary dip in your credit score.
Getting approval for a balance transfer card or a debt consolidation loan with poor credit can be challenging. However, some lenders specialize in helping those with lower credit scores, and consulting a credit counseling agency can also be beneficial. Remember, every situation is unique, and the best solution will depend on your individual circumstances.
Yes, transferring credit card debt to a personal loan is essentially what a debt consolidation loan does. The loan is used to pay off your credit card balances, effectively transferring your debt from the credit cards to the loan. It can make your payments simpler and possibly cheaper if the loan's interest rate is lower than your credit cards.
There are other options if a balance transfer credit card or debt consolidation is not a viable option for you. Other options include seeking help from specialized lenders, credit counseling agencies or negotiating with creditors. Filing for bankruptcy is another option, but this should be a last resort as it will severely damage your credit score.
About Doug Milnes, CFA
Doug Milnes is a CFA charter holder with over 10 years of experience in corporate finance and the Head of Credit Cards at MoneyGeek. Formerly, he performed valuations for Duff and Phelps and financial planning and analysis for various companies. His analysis has been cited by U.S. News and World Report, The Hill, the Los Angeles Times, The New York Times and many other outlets.
Milnes holds a master’s degree in data science from Northwestern University. He geeks out on helping people feel on top of their credit card use, from managing debt to optimizing rewards.
