Debt Consolidation Strategies: Balance Transfer Credit Cards vs.Personal Loans

Key Takeaways
  • Both a balance transfer and personal loan can save you money on credit card debt by lowering your interest rate and reducing the time it takes to pay off your debt.
  • You must qualify for both a balance transfer and a personal consolidation loan.
  • Fees can offset some of the savings you achieve through the lower interest rate on outstanding debts.

High credit card balances carried over month after month is a weary process because the minimum payment barely moves the needle. When debt levels exceed $15,000 or $20,000, it might feel as if you are destined to die with your debt.

High interest and daily compounding are two critical factors that make it hard to pay off credit card bills. Finding an alternative that can lower your rate is one way to speed up debt elimination.

You could avoid a significant amount of interest by either transferring the balance to a credit card with a promotional rate or consolidating debt with a personal loan. Here are the pros and cons of each:

What is a Credit Card Balance Transfer?

A balance transfer requires you to have excellent credit because you must qualify for another credit card offering a promotional rate. Credit card issuers often offer zero percent for 12 to 18 months if you transfer an existing balance at enrollment.

How Can a Balance Transfer Help You Pay off Debt?

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You save money because 100% of the payment reduces debt balances instead of going to interest charges. A balance transfer is best for smaller balances that you can pay in full within the promotional period.

Challenges You Could Face with a Credit Card Balance Transfer?

  1. You must qualify for new credit. If you already have multiple credit cards close to or at your credit limit, credit card issuers may not extend more credit.
  2. Short promotional period. Promotional rates range from six to 18 months, which does not give you a lot of time to pay off the balance. Can you commit to a large monthly payment that will eliminate the debt by the end of the promotion? If you cannot, you are back in the same situation you were before the balance transfer.
  3. New debt. You face the temptation to charge purchases on the credit cards you just paid off.
  4. Costs. Balance transfer fees typically cost between 3% and 5% of the amount transferred, reducing your savings.

What is a Personal Consolidation Loan?

A personal loan allows you to consolidate unsecured debt into a single loan with a fixed interest rate over a set time frame. Lenders specializing in debt consolidation loans can approve loans even if you have fair credit, making it easier to get approved even though you have sizeable amounts of existing debt.

How does a Personal Loan Help You Pay off Credit Card Debt?

A personal loan combines multiple debts into a single loan making it easier to manage. You control which account you consolidate and have a set time to pay off the debt. Transferring credit balances to a loan could improve your credit score because it lowers your utilization ratio even though debt levels remain the same.

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Challenges You Face with a Personal Consolidation Loan?

  1. You incur fees ranging between 1 and 8%.
  2. Not all personal loans have low rates. Lenders extend rates based on credit. Meaning, if you have marginal credit, you could still experience double-digit interest rates.
  3. Higher payments. High credit card balances can take decades to repay. A loan will shorten your debt payoff, but that often means higher monthly payments for the loan term.
  4. New debt. You face the temptation to run up new debt on the credit cards you just paid off.
  • Is a balance transfer better than a personal loan?

    Both options will reduce debt faster and save you money on interest charges. Personal loans are more suited for larger balances, where a balance transfer is better for smaller amounts of debt.

  • Is there a credit impact if I transfer debt balances?

    Transferring a credit card balance to a new card does not directly affect your credit because credit balances don’tchange. However, 30% of your credit score is the balance-to-available credit ratio. The calculation looks at overall utilization and per card utilization.

  • How does a consolidation loan affect my credit?

    A personal loan will not affect the amount of debt owed, but it will recategorize debt from a revolving line to a loan, which could help your score. However, adding new balances to paid-off credit cards could lead to a lower score.