Debt

Should I Get a Balance Transfer Card or Debt Consolidation Loan?

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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, you'll 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.

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.

For example, the Citi® Double Cash Card - 18 month BT offer from our partner gives new cardholders an introductory 0% APR on all balances transferred to the card within four months of opening your account. The promotional intro rate lasts for 18 months from the date of your first transfer.

Once the 18-month promotional period ends, the standard variable APR of 13.99% to 23.99% can apply to the remaining balance. If you pay off the transferred balance during the promotional period, you won't be charged any interest on the debt. However, you will have to pay a balance transfer fee, which is 3% of the transferred balance or $5, whichever is greater.

Balance transfer fees are common and are typically either 3% or 5% of the transferred balance, but there are cards on the market that carry smaller fees or don't charge any fee at all.

Review the terms of the balance transfer offer carefully before opening or using a new card in order to avoid potential headaches. For example, the presence of a transferred balance may void your card's grace period. If the card doesn't also offer a promotional 0% APR offer on purchases, your purchases could accrue interest daily. Without a promotional purchase APR offer—such is the case with the Citi® Double Cash Card - 18 month BT offer—it's best to pay off the transferred balance before using the card for purchases.

What Is a Debt Consolidation Loan?

A debt consolidation loan is a loan that you take out with the purpose of paying down one or more of your other debts. In doing so, you can consolidate (or combine) multiple debts into one new account, decreasing how many monthly bills you have to manage.

Consolidating debts can lead to savings if your new loan has a lower interest rate than your previous debts. And, your single monthly payment may be lower than the previous combined monthly payments—freeing up extra money each month.

Debt consolidation loans are typically unsecured personal loans. You can also consolidate debts using different types of loans, including home equity loans and cash-out mortgage refinancing. Be warned, however, that defaulting on a secured loan can cause you to lose the collateral that backs it, such as your home.

How to Decide Between a Balance Transfer or Debt Consolidation Loan

If you have debts with a medium to high interest rate (such as high single digits and above), balance transfer cards and debt consolidation loans could offer:

  • A lower interest rate
  • Lower monthly payments
  • Fewer monthly bills

Before you proceed, go over the pros and cons that accompany balance transfer credit cards and debt consolidation loans.

Balance Transfer Pros and Cons

Pros

  • 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 won't 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 card's 0% intro APR only applies to balance transfers, avoid using it to buy things until after you pay off the transferred balances.

Cons

  • Cards can have high standard APRs. Once the promotional period ends, any remaining balance will accrue interest at the card's 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 won't know the credit limit you'll be offered. Your credit card's balance, including transferred balances and fees, can't go above your card's credit limit. However, you won't 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.

Debt Consolidation Loan Pros and Cons

Pros

  • Low APRs are available. While a loan won't offer 0% APR, you may qualify for a low interest rate based on your creditworthiness.
  • Prequalification can help you narrow down your search. Many personal loan lenders let you apply for prequalification with a soft credit check—the type that won't hurt your credit scores. You could receive estimated offers for different loan amounts and interest rates. Or, you might find out that you likely won't be approved, which saves you from the potential credit hit that can come from submitting an application.
  • Rates and terms can be fixed. Unsecured personal loans often have a fixed interest rate and repayment term. You can use these fixed amounts to plan your monthly budget and know exactly when you'll pay off your loan.
  • It could help you improve your credit scores. Using an installment loan to pay down revolving debt (credit cards, for example) could lower your credit utilization rate. A lower utilization rate is better for your credit scores.

Cons

  • You'll likely be charged origination fees. Many unsecured personal loan lenders charge an origination fee of around 1% to 8% of the loan amount. Some lenders don't have any origination fees, but they may only work with applicants who have good to excellent credit.
  • Low rates and high loan amounts aren't guaranteed. You might only be able to get approved for a loan with a high interest rate. Or, the loan you're approved for may not be large enough to consolidate all your debts.

With the above in mind, you may see how the best option can depend on your circumstances. For instance, if you have a few thousand dollars of debt, a credit card with an intro 0% APR offer may be best—particularly if it has a low balance transfer fee and long enough promotional period that you can pay off the debt before the promotional rate ends.

However, if you'll need several years to pay off a large balance, a debt consolidation loan may be a better option. You could get approved for a large loan amount and receive a low rate for the entire repayment term.

Regardless of the option you choose, be careful not to build up a high balance on the accounts you've zeroed out and transferred to the new account. This will compound your troubles and make it much harder to pay off your transferred debt.

Alternatives to Balance Transfers and Debt Consolidation Loans

In some cases, neither a balance transfer card nor a debt consolidation loan makes sense. For example, if you have poor credit, you might not qualify for good credit card or loan offers. Or, if you're in debt from overspending on credit cards, you may need to address your spending before focusing on paying off balances.

Here are a few alternative options you may want to consider:

  • Debt management plans: Credit counselors offer debt management plans (DMPs) to clients who are having trouble with unsecured accounts, such as credit cards, regardless of their credit scores. If you sign up for a DMP, the counselor can try to get fees waived and lower your interest rates or monthly payments. You'll then make one monthly payment to the counselor, who distributes the money to your credit card issuers. DMPs generally lead to paying off the included debts within three to five years, but you'll likely need to close your credit cards while you're on a DMP.
  • Budgeting: Addressing overspending can help you reign in your bills and free up money to pay down debts. Creating a budget is often the first step. Then, you'll need to stick to the budget while looking for additional ways to make more money and spend less.
  • Contacting your creditors: If you're having trouble affording your payments and are looking for a short-term solution because of a temporary setback, contact your creditors directly. They may have hardship programs available that allow you to temporarily lower or skip payments, especially if you contact them before missing payments.
  • Bankruptcy: If you're overwhelmed by monthly bills, lowering your interest rate or monthly payment might not be enough of a solution. In some extreme cases, wiping out debt through bankruptcy is something to consider. Keep in mind, though, that bankruptcy has severe consequences on your credit and should be viewed only as a last-resort option.

Compare Offers Before Opening a New Account

There are many balance transfer credit cards and debt consolidation loans available, and you'll want to compare your options and the offers to find which will be best.

For example, if you're choosing a balance transfer card, consider the card issuer, balance transfer fee, purchase APR offer, promotional term length and whether you'll want to keep the card after paying off the balance. The Experian CreditMatchTM credit card marketplace lists some of our partners' cards with balance transfer offers. Once logged in, you can also get personalized offers based on your credit profile.

With debt consolidation loans, you may want to look at the lenders' loan amounts, fees and interest rate ranges. Find a few top lenders, then submit soft credit prequalification applications to see your offers. The Experian CreditMatchTM tool can make this easy by analyzing your credit profile and providing you with loan offers. Your offers will be good for 30 days, giving you plenty of time to figure out which to choose.