Working hard to pay off high-interest debt and feel like you could use some breathing room? Two popular tools include debt consolidation loans—a personal loan you take out to pay off other debts with—and balance transfer credit cards offering 0% introductory APR periods.
Either can allow you to consolidate multiple debts into one monthly payment, streamlining your financial obligations. And, either can potentially help you save on interest compared to what you would have paid on your original debts. So, which is the right tool for your situation?
The answer will depend on factors such as how much debt you’re carrying and how much money you can afford to put toward your payment each month. We’ll help you decide.
Balance transfer vs. personal loan at a glance
Either a balance transfer or a debt consolidation loan can be a good option for paying off high-interest debt. For example, if you’re carrying credit card debt on a card with a high annual percentage rate (APR) or have outstanding medical debt, transferring this debt to a balance transfer card or paying it off with a personal loan might be a smart move.
Plus, if you’ve been struggling to keep up with payments on multiple accounts, consolidating your debts into one monthly payment may simplify your financial obligations.
Here are a few key similarities and differences between balance transfers and personal loans.
| Balance transfers | Personal loans |
|---|---|
| May offer 0% intro APR periods of up to nearly two years | May offer repayment terms up to five years or sometimes longer |
| Interest charges begin after the 0% intro APR period ends | Interest will be charged throughout the life of the loan |
| Good to excellent credit typically required | Good credit or better needed for the best rates |
| Amount you can transfer will be subject to your new card’s credit limit | May allow you to borrow a higher amount and consolidate more debt |
| Often involves a balance transfer fee of 3% to 5% | Some lenders may charge origination and/or prepayment fees |
| May offer 0% intro APR periods of up to nearly two years | |
|---|---|
| Personal loans | May offer repayment terms up to five years or sometimes longer |
| Interest charges begin after the 0% intro APR period ends | |
| Personal loans | Interest will be charged throughout the life of the loan |
| Good to excellent credit typically required | |
| Personal loans | Good credit or better needed for the best rates |
| Amount you can transfer will be subject to your new card’s credit limit | |
| Personal loans | May allow you to borrow a higher amount and consolidate more debt |
| Often involves a balance transfer fee of 3% to 5% | |
| Personal loans | Some lenders may charge origination and/or prepayment fees |
How a balance transfer credit card works
When researching balance transfer credit cards, you’ll look for products offering new customers a 0% introductory APR period on balance transfers for a specified number of months. Note that some credit cards offer 0% intro APR periods on purchases, but you’re specifically looking for one with an offer on balance transfers.
There may be a period within which you need to request your transfer to qualify for the intro period—for example, within four months of account opening.
It’s often possible to enter your transfer request online, directly after receiving approval for the new card. Otherwise, you may be able to submit the transfer request later through your online account for the new card or by calling the issuer. There will typically be a fee of 3% to 5% of the amount transferred added to your balance on the new card.
During the 0% intro APR period, the entirety of your payments go toward the principal of the debt rather than interest and principal. If there’s any debt left after the intro period ends, interest starts accruing on the remaining balance at the account’s regular APR. Note that even during the 0% intro period, you’re responsible for making at least the minimum payment due on your card each month.
While balance transfers sometimes process in a few days, they can also take as long as a few weeks. If you have payments due on your old accounts in the interim, it’s important to make those payments to stay current.
Impact of a balance transfer on credit score
At first, opening a balance transfer credit card is likely to ding your credit score by a few points. That’s because when you apply for the card, the issuer will pull your credit via a hard inquiry. But, the negative impact from an inquiry should fade after a year.
In the long run, correctly managing a balance transfer has the potential to improve your credit score. That’s because your overall credit limit is now higher, thanks to the addition of a new card, and your utilization should be decreasing as you actively pay down debt.
Utilization refers to how much of your available credit you’re using. It’s calculated per individual card and across all your credit cards too. Only revolving credit—so, mainly credit cards—factors in, not installment credit like personal loans, auto loans, and mortgages.
Experts recommend never letting utilization get above 30%. For example, if you have one credit card with a $2,000 credit limit and another with a $3,000 limit, and you’ve got a combined balance of $1,500 between the two cards, that’s 30% utilization.
If you open a new balance transfer credit card, that increases your overall available credit. And if you stick to a plan of consistently paying down debt, your utilization will decrease.
Amounts owed, which considers your utilization, makes up 30% of your FICO Score. So significantly reducing your utilization can be a good way to improve your score.
Pros and cons of balance transfers
Pros
- Can potentially help you avoid paying interest entirely
- May empower you to pay off your debt more quickly
- You might get a card worth keeping after you’re debt free
Cons
- Balance transfer cards require good to excellent credit
- You’ll typically pay a fee of 3% to 5% of the transfer
- Shorter repayment terms compared to personal loans
How a debt consolidation loan works
You can think of a debt consolidation loan as essentially taking out a loan to pay off other debt. Possible benefits include a lower interest rate on the new loan than the old debt and consolidating multiple payments on the old accounts into one payment on the new account.
It can also be helpful to have a set payoff date with a loan compared to carrying credit card debt and making just the minimum payment each month. As credit card minimum payments go largely toward interest—and pay down only a small amount of the principal of what you owe—it can take many years and a hefty amount of interest before you’re out of debt by making minimum payments.
A loan payment might be more expensive in terms of the amount you must pay each month, but may very well save you money over time.
Impact of a debt consolidation loan on credit score
In the short run, applying for a new personal loan can slightly decrease your credit score because the lender will pull your credit report with a hard inquiry. But, this decrease should be minimal. In the long run, a responsibly managed personal loan can improve your credit score. For one thing, it can improve a credit score factor known as your credit mix.
Your credit mix accounts for 10% of your FICO Score. If your only exposure to credit thus far has been a credit card or perhaps a retail account, adding an installment loan improves your credit mix and shows lenders you can reliably make your fixed payment each month.
Plus, if you’re paying off credit card debt with your loan, your utilization may improve. Remember how in the section on balance transfers we explained that utilization only factors in revolving credit? Thus, paying down credit card (revolving) debt with an installment loan can reduce your utilization if you don’t rack up additional credit card debt.
Pros and cons of debt consolidation loans
Pros
- May be more accessible for good and fair credit
- Might offer more funds than a balance transfer card
- Option for longer repayment terms
Cons
- Paying interest is unavoidable
- You might pay origination and/or prepayment fees
- Potential for a high monthly payment
How to choose between a balance transfer and a loan
A balance transfer might be a good fit if…
- You’re disciplined about paying more than the monthly minimum.
- You’ve realistically budgeted to pay off the debt in 12 to 21 months.
- Your credit is good to excellent (think a score of 670 to 850).
A personal loan might be a good fit if…
- You need the structure of a fixed monthly payment amount.
- You’re seeking a repayment term longer than a year or two.
- A balance transfer card’s credit limit might not be high enough to consolidate all your debt.
The takeaway
Either a balance transfer or a personal loan can be a valuable tool for getting out of debt. Used wisely, you should be able to consolidate high-interest debt from multiple sources into one monthly payment, and hopefully either secure a lower interest rate or avoid interest entirely. Which one you choose will depend on how much debt you’re carrying, how long you need to pay it off, and what you can qualify for.
It’s important to budget realistically for what your monthly payment will be to get out of debt. Simply doing a balance transfer or taking out a loan and then resuming past spending habits could mean you end up deeper in debt.
If you’re juggling multiple obligations, we recommend adopting either the debt avalanche or debt snowball method to stay on track. With the debt avalanche, you focus on paying off your debts starting with those having the highest interest rate and working your way down. By contrast, the debt avalanche focuses on paying smaller debts first to get quick wins, then working up to the larger debts. Of course, you must continue making at least minimum payments each month to keep all accounts current.
Frequently asked questions
Where can I get a debt consolidation loan?
A debt consolidation loan is a personal loan you use to pay off your current debts from other creditors. Banks, credit unions, and online lenders all offer personal loans.
Can I get a personal loan with a fair credit score?
Typically, it’s helpful for applicants to have good credit (think a FICO Score of 670 or higher) or better for best chances of approval and a low interest rate. Some lenders may work with folks who have fair credit (generally considered a FICO Score of 580 to 669). But, know that if you are approved for a loan, you’ll likely face a higher interest rate than someone with a score that falls in the good, very good, or exceptional credit brackets.
Where can I get a balance transfer credit card?
Numerous banks and credit unions issue cards with 0% intro APR periods. As a starting point for your research, know that Citi and Wells Fargo are two banks that issue balance transfer cards widely praised for lengthy introductory periods.
But, it’s important to note you can’t pay off credit card debt with a new card from the same institution that holds your old debt. So, if you’re already carrying debt on a Citi credit card for example, you’d need to look to an issuer other than Citi for your new balance transfer card.
How much debt can I move to a balance transfer card?
The maximum amount you’d be able to transfer in theory is the credit limit on your new card. But there are some limitations that mean you typically can’t transfer quite that much.
For one thing, if there’s a balance transfer fee, you must factor in that amount as counting toward the credit limit. And for another, issuers may institute caps—such as Chase specifying that balance transfer requests cannot exceed $15,000 in a 30-day period.
Do I have to open a new credit card to do a balance transfer?
Not necessarily. Sometimes, credit card issuers will extend balance transfer offers to existing customers. Before applying for a new card, if you have an existing card that you don’t have a balance on and don’t intend to use for new spending in the near future, it’s probably worth checking your online account for a balance transfer offer.