If you are looking to consolidate your debt, you may be wondering if a personal loan or credit card for balance transfer is the best option. Both have their pros and cons, so it’s important to compare them before making a decision.
Balance transfer credit cards may offer an interest-free upfront period, but they tend to have higher interest rates than personal loans after the initial period. And the introductory period is usually much shorter than the term of a personal loan.
Personal loans usually have more stringent eligibility requirements than other financing options, but they offer a fixed interest rate and predictable monthly payments. And with repayment periods of up to seven years, you can save more on interest payments in the long run, especially if you have a large debt that cannot be repaid during the balance transfer card promotional period.
Before making a decision, it is important to compare the two options and consider your financial situation.
Credit cards with balance transfer: pros and cons
pros
- It can save you money if you can pay off the balance during the promotional period with zero interest.
- Consolidates your existing debt on one card
- May help your credit score in the long run
- Provides you with a revolving line of credit that you can use after you pay off the transferred balance.
Minuses
- Most cards charge a balance transfer fee, usually between 3 and 5 percent.
- The regular APR after the promotional period may be higher than the APR of the card you are transferring from.
- Can hurt your credit score in the short term
Consumer loans: pros and cons
pros
- Fixed interest rate
- Predictable monthly payment
- A personal loan can consolidate various types of debt
Minuses
- Stricter eligibility requirements than other types of financing
- May come with fees and penalties that can increase the cost of borrowing
- Can hurt your credit score in the short term
How is it better?
Both balance transfer credit cards and personal loans are popular ways to pay off debt, and you can save some money along the way.
The main difference between the two is that balance transfer credit cards usually offer an interest-free period up front, while personal loans usually have a fixed interest rate. And regular annual interest rates on balance transfer cards tend to be much higher than interest rates on personal loans.
In addition, balance transfers are good for paying off small balances on one or two high-interest credit cards, while personal loans are usually used to combine multiple debts into one fixed monthly payment.
Balance transfer cards typically have a zero interest promotional period of 12 to 21 months, although the average regular annual interest rate for a credit card is over 19 percent. According to Bankrate, consumer loans typically carry an interest rate of 3 to 36 percent, with an average of 11.08 percent.
The term of a personal loan can vary in duration, but terms from one to seven years are commonly used. A balance transfer card can offer greater interest savings if you can pay off the debt within a shorter time frame (less than two years, for example). A personal loan can offer more flexibility if you need more time to pay off your debt, even if you don’t avoid paying interest.
What are the loan requirements?
If you are interested in a balance transfer credit card, you will generally need a good to excellent credit score (at least 670) to qualify. However, there are several balance transfer credit cards available to applicants with a fair credit history (score between 580 and 699).
Personal loans tend to have stricter approval standards than other financing options, and you may not qualify for one if you have a low credit score. Good credit is preferred, but lender requirements vary.
If you are unable to qualify for a balance transfer card or personal loan, consider non-profit debt management to consolidate payments and lower interest rates. Depending on who you owe money to, a debt management plan can reduce your APRs to the single digits. However, your enabled accounts will be closed.
How will debt consolidation affect my credit score?
Your credit score may temporarily deteriorate in the short term if you consolidate your debt through a balance transfer or personal loan. This may be the result of a thorough investigation that results in a slight decrease in your credit score. A new account can also reduce the length of your credit history by reducing the average age of your accounts, although the impact may be limited if you have other older accounts on your credit report.
However, in the long run, your credit score should improve if you practice good credit habits. The new balance transfer card can lower your credit utilization rate by giving you more total available credit. You will continue to improve your credit usage in the even more important category of your payment history, reducing your balance by making payments on time each month. And the initial impact of a hard investigation on your credit report will decrease.
A personal loan can also improve your credit utilization ratio if you use it to pay off a credit card, since installment loans do not count towards it. And adding credit to your credit report can help you in the credit mix category, which demonstrates to lenders that you can handle different types of accounts.
However, your credit score is likely to drop if you miss a payment or start accumulating new balances on a credit card that you paid off with a balance transfer or personal loan.
What fees are associated with each option?
Balance transfers typically come with a fee of 3 or 5 percent of the transfer amount, often with a minimum fee of $5 to $10. You will also be charged a late payment fee of up to $41 if you make a payment after the due date.
Some personal loans come with an issuance fee that is a percentage of the loan amount. While this is usually included in the loan amount, it can affect the overall cost of borrowing. Depending on the lender, you may also pay a late payment penalty or an early repayment penalty.
bottom line
Balance transfer credit cards and personal loans are popular ways to help pay off debt and save money along the way.
If you want to consolidate your existing debt on one card and save money on interest, a balance transfer credit card may be the right financing option for you. However, personal loans can help you pay off a large balance (or more than one type of debt) with a fixed interest rate and predictable monthly payments.
Whichever option you choose, it’s important to focus on paying off your debt and not take on more. Start by creating a budget that includes your monthly card or loan payment, and look for ways to save money or cut other expenses.
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