Credit Card Balance Transfer vs. Debt Consolidation Loan

Choose which debt transfer option is best for you

A top view of a person sitting on the floor surrounded by their credit card bills and a laptop, deciding between a balance transfer and a debt consolidation loan
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Juggling multiple debts can be stressful and lead to other money problems. Even one high-interest debt can be a challenge. With total credit card debt standing at $756 billion and the average credit card balance at $5,315, according to the credit bureau Experian, it's safe to say many Americans are dealing with the difficulties of paying off debt.

If you've decided to prioritize paying off your debt, simplifying your accounts can make your monthly payments more effective and help you pay down your balances sooner. Here, we'll explore two options for consolidating your debts.

How Credit Card Balance Transfers Work

A balance transfer involves moving a balance from one credit card to another. Typically, the goal is to move the debt from a credit card with a higher interest rate to one with a lower interest rate, ideally taking advantage of a 0% APR balance-transfer promotion.

If you make purchases using your balance transfer credit card during the promotional period, you could lose your grace period and prematurely trigger the regular APR on your entire balance. 

How Debt Consolidation Loans Work

Another option is to pay off your credit card balances using a debt consolidation loan, which effectively combines multiple debts into a single loan with a fixed monthly payment and fixed repayment period.

Debt consolidation loans may be secured, where the loan is backed by collateral, or unsecured. Unsecured loans, like personal loans, tend to have higher interest rates that vary based on your credit standing. Secured loans usually carry lower interest rates, but you risk losing the underlying asset if you default on the loan.

Balance Transfers vs. Debt Consolidation Loans

No matter which option you choose, it's important to stop using your credit cards while you pay off your debt. Otherwise, you could build up even more debt than you had before.

Eligible Debts

A balance transfer allows you to pay off other credit card balances. With a debt consolidation loan, you can pay off credit cards, personal loans, and other types of debts up to the loan amount.

Fees

Balance transfers generally cost 3% to 5% of the transferred amount, often with a minimum fee of $5 to $10. The higher your transfer amount, the higher the fee you'll pay.

Occasionally, credit card issuers offer no-fee balance transfer promotions, although you may have to transfer your balance soon after opening the account to qualify.

With a debt consolidation loan, you may pay an origination fee to cover the cost of processing your application. Many lenders don't charge any upfront fees, though, so shopping around can help you get the best deal.

Interest Rates

Balance transfers are a good option when you can qualify for a 0% interest rate promotion. After the promotional period ends, the regular interest rate will kick in, which could be as high as 36% depending on the credit card. Paying off your full balance during the promotional period allows you to avoid paying interest on the balance.

Debt consolidation loan interest rates also vary depending on the type of loan and your credit standing. If you have a lower credit score, your interest rate—and your monthly payment—will likely be higher.

Credit Requirements

A higher credit score gives you more options for both debt consolidation loans and balance transfers. If you have a low credit score, you may not be able to qualify for a low interest rate balance transfer credit card at all.

Repayment 

Transferring a balance to another credit card requires you to be disciplined and committed to paying off your debt. Your credit card issuer will only require you to make minimum monthly payments, which may not be high enough to wipe out the entire balance during the promotional period and avoid paying interest.

Debt consolidation loans typically have a fixed monthly payment and fixed repayment period, making it easier to budget for your monthly payments. 

Potential Savings

Paying off a balance transfer as quickly as possible under a 0% APR promotion is key to minimizing the amount of interest your debt costs you.

Whether you actually save money with a debt consolidation loan depends on the interest rate and repayment period. You could end up paying more overall if your loan repayment is stretched over a long period of time.

Credit Impact

Applying for and opening a new account will generally impact your credit by adding a new inquiry to your credit report and lowering your average credit age.

Transferring balances to a new credit card could spike your per-card credit utilization, which could negatively affect your credit score. Fortunately, your credit score will rebound as you pay your balance down, as long as you're otherwise responsible with your credit card usage.

A debt consolidation loan could help boost your credit score, since the credit utilization ratio for those accounts will drop to zero once the balances are paid off with the loan.

Balance Transfer Debt Consolidation Loan
Eligible debts Credit card debt only Many types of debt: credit cards, medical bills, loans, etc.
Fees 3% to 5% of the transfer amount (minimum $5-$10), depending on the credit card. Some credit card issuers waive the fee. Potentially a loan origination fee or closing costs depending on the type of debt consolidation loan
APR 0% introductory rate for 6-20 months, then 8.25% to 36%, depending on the card Varies depending on credit score. Borrowers with lower credit scores could have higher interest rates
Credit requirements Varies, but typically good credit is required Varies, depending on the type of loan and whether the borrower has collateral 
Repayment Minimum monthly payments required. Payoff timing depends on the monthly payment amount Fixed monthly payment and fixed repayment period
Potential savings No interest if the balance is paid in full during a 0% promotional period Longer repayment periods could result in more interest paid overall
Credit impact Applying for and opening a new credit card and potentially increasing the credit utilization on a single credit card could negatively impact your credit score Applying for and establishing a new loan could potentially hurt your credit score. Paying off credit card balances—and lowering the overall credit utilization—could boost the borrower's credit score
Late payment penalties Loss of the promotional interest rate; up to $39 late fees Late fees, depending on the loan, and potentially a risk of foreclosure, if you're late on a  home equity loan

The Bottom Line

A balance transfer is the better deal if you only have credit card debt to pay off, you qualify for a 0% promotional APR, and you can pay off most or all of your balance during the promotional period.

On the other hand, using a debt consolidation loan is a better strategy if you have a large amount of debt to pay off or your debt is spread across several types of loans and credit cards. A debt consolidation loan has the benefit of a fixed monthly payment and fixed repayment schedule, making it easier to build into your monthly budget.