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Key takeaways
- Debt consolidation loans and balance transfer cards have distinct advantages and disadvantages when it comes to paying off debt.
- Debt consolidation loans give you a definite payoff date with a fixed interest rate. They can be a smart choice for consumers who need longer payoff periods or who plan to pay down different types of debt.
- Balance transfer credit cards — especially those with long introductory APR offers — may be a better fit for those who can pay off their debt more quickly or who want to retain the flexibility of having an open credit line once they’re out of debt.
Two of the most popular methods to help pay down debt and save money along the way are balance transfer credit cards, which let you transfer debt from other sources and pay as low as 0 percent interest for an introductory period, and debt consolidation loans, which are unsecured personal loans that you use to pay off your other debts, often at a lower interest rate.
Understanding the differences between the two can help you decide which is best for your debt consolidation goals.
What is a balance transfer credit card?
A balance transfer card is a credit card that typically offers low introductory rates if you transfer balances from other higher APR credit cards. If you have excellent credit, you may qualify for a 0% intro APR credit card.
Any low starting rate you receive will usually only last for 12 to 18 months, but may be longer or shorter depending on the credit card company. Most balance transfer cards charge a fee of 3 to 5 percent of the amount you’re transferring, which can eat into the benefit of a balance transfer. And if you don’t pay the transfer balance off within the introductory period, you’ll end up paying a much higher rate and reducing any potential savings.
Who it’s for
- Borrowers who can pay the balance off quickly. A balance transfer card is best for borrowers with good to excellent credit who have the resources to pay the balance off within the low-rate timeframe.
- Those who need payment flexibility. You can still make a minimum credit card payment, which is something you give up if you opt for a debt consolidation loan.
- Credit card debt consolidators. Most transfer cards limit you to transferring credit card debt.
What is a debt consolidation loan?
A debt consolidation loan is a personal loan with a fixed rate and set payment, usually between 12 and 84 months. You receive all of your funds at once, and depending on the lender, you may pay an origination fee ranging anywhere from 0 to 10 percent.
One distinct advantage of using a debt consolidation loan to pay off credit cards is its positive impact on your credit utilization ratio. This ratio measures how much available revolving debt you have outstanding. The higher the ratio, the lower your credit scores.
The major downside is that debt consolidation loans do not offer a minimum payment option. This could make it unaffordable if you have variable income, such as tips or commissions. You may also want to skip this type of loan if your credit is in bad shape, as rates can be as high as 36 percent for borrowers with bad credit.
Who it’s for
- Borrowers who want a clean credit card slate. A debt consolidation loan is best for borrowers who want to clear out credit card debt with a definite payoff date. Average personal loan rates are currently at 12.46 percent, but excellent credit borrowers may qualify for rates below 7 percent.
- Those who want to save on interest charges. It’s also a good option to save money on interest charges, since average current credit card rates sit around 20 percent.
- Consumers looking to improve their credit scores. A debt consolidation loan can be a great option to get off the revolving credit card merry-go-round and boost your credit score by lowering your credit utilization ratio.
Should you get a personal loan or a balance transfer credit card?
The decision between a balance transfer card and a debt consolidation loan depends on how quickly you want to pay the debt off and how much flexibility you want with the payments. Seeing the benefits side by side may help you decide between the two choices.
| Balance transfer cards | Debt consolidation loans |
| You can afford to pay the transferred balance off quickly. | You need more time to pay the balance off. |
| Your income varies month-to-month. | You have a consistent monthly income. |
| Your credit score is high enough to qualify for 0 percent interest offers. | Your credit is fair or good, but not excellent. |
| You don’t qualify for zero-fee debt consolidation loans. | You want to improve your credit score and stop using credit cards. |
| You’re only consolidating credit card debt. | You want to consolidate different types of debt. |
Bottom line
Getting rid of credit card debt can be a great way to strengthen your financial foundation. However, if you frequently turn to balance transfer or debt consolidation loans, it may be time to examine your spending habits and budget. Approach each option with caution, and if you aren’t sure which will work best, speak to a financial advisor to get an idea of which option fits your unique financial situation.
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