What Is a Balance Transfer?
A balance transfer moves debt from one account to another, for example, from a high-interest credit card or loan to a new credit card with a low or 0% introductory annual percentage rate (APR). Typically, this lower APR lasts for six to 12 months before the standard interest rate kicks in.
In addition to a low initial APR, balance transfers may come with other favorable terms like no late fees or a payment due date of your choice. In some cases, the card will also come with balance transfer checks. While you can put the proceeds from these checks toward other loans (auto loans, for example), the check amounts will be added to the balance of your card at the introductory APR.
- Alternate name: Credit card balance transfer
How Does a Balance Transfer Work?
To take advantage of a balance transfer credit card, find a card offer that your credit score qualifies you for, read the terms of the card, and ask your card issuer to transfer the debts to a credit card. You can often do this online. You will receive a new card with the balance you transferred plus a balance transfer fee from the card issuer. You'll now only have one bill to monitor, which can simplify monthly payments.
Balance transfers are most attractive when you know you will pay off transferred debt before the introductory APR expires, which would allow you to pay no interest on your debt. Eliminating interest charges not only reduces the total costs of borrowing but also keeps your loan balance from growing, as 100% of each payment will go toward reducing your debt during the no-interest period. That being said, it's critical to understand the terms of your offer.
Find out whether you’ll have to pay a fee to transfer balances. Costs are often around 3% to 5% of the amount you transfer, or a flat dollar amount, such as $20. However, a few balance transfer cards charge no fee if you transfer the balance to the new card within a certain number of days of opening the card.
You might also take on new annual fees if you open a new credit card. Any savings you get from a lower interest rate need to exceed the transfer and annual fees to make the balance transfer worthwhile.
The best interest rates are available for customers with good or excellent credit. You might see tempting introductory APR offers in advertisements, but you may not qualify for them. Don't bite until you evaluate what the card issuer actually offers after reviewing your credit.
Even if you get 0% APR, the rate likely won't last. Check to see when the introductory rate expires and what standard rate applies after that period. In some cases, you'll need to pay off your balance during the introductory period to avoid deferred interest charges, which backdates the interest charges and could force you to pay interest accrued from the time you transferred the balance.
You'll generally need a credit score of 670 or higher to qualify for a balance transfer card.
Balance transfers can negatively affect your credit, albeit not permanently. Every time you apply for a new balance transfer card, lenders make a hard inquiry into your credit, which can temporarily decrease your credit score by five points. New credit makes up 10% of your credit score, so you may not want to open a balance transfer card if you recently opened several other credit accounts.
If you end up opening a credit card to transfer balances, use it to pay off rather than increase your debt. Avoid using a balance transfer card for spending, which can send you deeper into debt. Your credit utilization ratio, which is the credit in use divided by your total credit limit, accounts for 30% of your credit score. Carrying too much debt (a ratio of over 30%) may hurt your credit score.
What Is a Personal Loan for Debt Consolidation?
In addition to using a balance transfer credit card, you can also get a personal loan for debt consolidation, which is a new loan you take out to pay off an existing debt balances.
The new loan might be an unsecured loan, a secured loan, or a P2P loan. Whichever option you choose, a personal loan should ideally come with a lower interest rate or smaller monthly payments, which can reduce the costs of borrowing or make payments more manageable. An added benefit: Since you're combining several loans into one, you'll only have to keep track of one monthly payment.
Debt consolidation loans sometimes come with a fixed interest rate, so they make more sense than a balance transfer when the introductory period on the balance transfer card is too short. For example, a 0% APR offer for three months might not be useful if you need three years to pay down your debt.
You may or may not pay any up-front fees for personal loans. With some loans, you’ll see obvious costs, such as processing and origination fees. With other loans, the costs will be built into the interest rate or may kick in later in the loan term. Compare several loans to find the combination of up-front fees and interest charges that benefits you the most.
If you want to maintain flexibility in terms of when you pay off the debt consolidation loan, avoid lenders that impose prepayment penalties, which may force you to pay a fee if you pay off a loan before the loan term expires.
The rate you pay will depend on your credit and the type of loan you use. You'll need at least a "fair" credit score above 580, but the higher your score, the lower your interest rate will be generally.
Moreover, an unsecured loan doesn't require you to put up collateral to secure the loan, so it will generally have a higher rate than a secured loan that uses your home as collateral. This means that even with a stellar credit score, you could be approved at a higher interest rate for a personal unsecured loan than for a secured home equity loan, for example.
Interest rates for debt consolidation loans can be fixed and unchanging or variable, meaning they’ll move up and down like credit card rates. Fixed rates make it easier to plan because you’ll know what your monthly payments will be for the life of the loan. But fixed rates typically start out higher than variable rates.
You’ll probably pay interest on the loan at a rate that’s lower than standard credit card interest rates, but introductory rates on balance transfer cards could be even lower, at least for a limited time. Still, if you plan to pay off debt over several years—longer than any credit card promotion—you might do better with a debt consolidation loan.
Determine your monthly personal loan payments over various amounts of time, using our personal loan calculator. Compare these payments with what you're paying on all your cards, every month, and how much you'd pay with a balance transfer card. Just remember that the balance transfer interest rate lasts for a limited amount of time.
Just like with balance transfer credit cards, new loans require hard inquiries that can impact your credit scores, at least in the short term. Over the long term, some debt consolidation loans could potentially be better for your credit than balance transfers. On the flip side, making late payments on the loan can hurt your credit score.
Credit mix, which refers to the types of credit accounts you hold, makes up 10% of your credit score. Since scores are higher when you use a mixture of different types of credit, adding loans into the mix can give your credit score a boost and make you more attractive than a borrower who relies solely on credit cards.
A debt consolidation loan can also help you reduce your debt over time, which can, in turn, reduce your credit utilization ratio and give your credit score a bump. If you make payments on time and only take on new debts you can afford, you will likely strengthen your credit with a debt consolidation loan.
Debt consolidation loans can carry additional risk. If it's a secured loan, you will have to pledge collateral, meaning you must give the lender permission to repossess or take your assets and sell them if you fail to repay the loan.
For example, you might pledge your home as part of a home equity loan, or you might use your car as collateral for an auto loan. If you fail to make payments on the loan, you could lose your home in foreclosure or have your car repossessed.
There are two ways to minimize this risk:
- Keep unsecured loans unsecured: Collateral can help you get approved, but because pledging your assets is risky, it may be best to consolidate unsecured debts with an unsecured loan because the only thing at risk is your credit. If, in contrast, you take out a secured loan such as a home equity loan to pay off unsecured credit card debt, you will dramatically increase the risk of losing your home.
- Refinance secured loans: If you already have debt that is secured by collateral, consider refinancing the loan, or replacing the loan with a completely new loan. For example, consider using a balance transfer card or a debt consolidation loan for unsecured debts, and get a different loan for your secured debts.
Consolidating Student Loans
If you have student loans, do some homework before consolidating those loans. Government loans provide unique benefits like the potential for loan forgiveness or the ability to postpone payments. If you consolidate with a private lender, you may lose access to those borrower-friendly features.
Balance Transfer vs. Personal Loan
|Balance Transfer||Debt Consolidation Loan|
|Allows you to pay off debt interest-free if you get 0% APR and pay off the balance within the introductory period||Allows you to pay off debt over time and merge multiple loans|
|If you carry your balance beyond the 0% APR period and only make the minimum payment, it could take years to pay off the balance||Set repayment term that guarantees payoff by a certain date if you make your payments|
|Unsecured, meaning your property is not at risk||If you take a secured loan, you risk losing your property in default|
Both options have the effect of merging multiple debts into one, which can make payments more manageable. Provided that you secure more favorable terms from the balance transfer or loan, such as lower interest rates or smaller payments, both approaches can also make your payments more affordable.
The best choice for you depends on the terms you get, your repayment plan, and your comfort with risk. A balance transfer is preferable if you secure a 0% introductory APR and can pay off the balance before that period expires. As unsecured debt, a credit card is also low in risk—your property isn't on the line if you fail to make payments.
A debt consolidation loan may be a better option if you want to merge multiple personal loans into one monthly payment or if you plan to repay your loan over a long period of time. But if you opt for a secured loan, you risk losing your property if you can't repay the loan.
Regardless of which option you choose, minimize or avoid new debt as you pay off the balance transfer credit card or the debt consolidation loan so that you stay on track to get debt-free.
- A balance transfer allows you to transfer high-interest debts to a credit card with a low or 0% APR.
- Balance transfers may be a good choice if you will be able to pay off your debt during the introductory period.
- Personal loans are an alternative to balance transfers. These loans sometimes come with a fixed interest rate, making them a good choice for borrowers paying over time.
Experian. "What Affects Your Credit Scores?"
Experian. "What is a Credit Utilization Rate?"
Experian. "What Is Debt Consolidation?"