When considering debt consolidation vs balance transfer options, it's important to understand what each offers. Our best debt consolidation loans provide a structured way to combine multiple debts, while balance transfer credit cards offer a different approach to simplifying your finances.
This article will walk you through the key differences between these methods so you can decide which approach is right for your situation.
What Is a Debt Consolidation Loan?
Debt consolidation loans are personal loans specifically designed to help you combine multiple debts into one. You borrow a lump sum from a bank or lender and use those funds to pay off all the debts you want to consolidate—in many cases, the lender can even pay your creditors directly on your behalf.
Once consolidation is complete, you'll make a single monthly payment to your new lender until the loan is fully repaid, typically over a term of up to five years.
"The primary purpose of consolidation loans is usually to lower monthly payments and reduce interest rates," explains Michael Sullivan, personal finance consultant with Take Charge America, a national nonprofit credit counseling and debt management agency.
"Credit card debt is often the target for consolidation because of its notoriously high interest rates."
Pros of Debt Consolidation Loans
Simplified payments: Combining multiple debts into a single loan with a fixed monthly payment simplifies your debts and makes them easy to track.
Lower interest rate: If you can qualify for a lower interest rate than the ones you’re currently paying, you could save money on your debts.
Repayment timeline: With a personal loan, you get an established repayment timeline to pay off your consolidated debts in full.
“The pro of consolidation is that it could very well save money while making budgeting easier by reducing payments,” says Sullivan.
Cons of debt consolidation loans
Credit score requirements: The best interest rates are only available to borrowers with good or excellent credit scores. If your credit isn’t in the best shape, you may not save as much money by consolidating your debts.
Fees: Personal loans have loan origination fees, which are a percentage of the loan balance. You will need to account for this fee when you decide how much you need to borrow.
Extended repayment timeline: In some cases, personal loans might cause you to take longer to pay off your debt if you choose a repayment term that’s longer than the debts you plan to consolidate.
Debt consolidation loans also “create the opportunity to incur even more debt if the consumer continues to use the paid-off credit cards or otherwise [increases] their debt. Consumers having trouble with debt often have more difficulties when provided with more credit,” says Sullivan.
What Is a Balance Transfer Credit Card?
Balance transfer credit cards are credit cards that allow you to move balances from your existing credit cards onto a new one. While many credit cards offer balance transfers, the most beneficial ones have introductory APRs for a limited time (typically six months to over a year).
Essentially, you can transfer your credit card debts onto the new card and work on paying down the balance without any monthly interest charges to worry about.
Pros of Balance Transfer Credit Cards
Simplified payments: Combining multiple credit card balances onto a single credit card with one monthly payment simplifies your debts and makes them easier to track.
Lower interest rates: Qualified borrowers can get introductory APRs as low as 0%, which can save you a ton of money in interest if you can pay off the balance before the promotional period expires.
Long promotional periods: Promotional 0% APR periods often last for a long time—from six months to eighteen months, or even longer. This gives you plenty of time to work on paying down the principal balance of your debts while not adding additional interest.
“Although there's usually a 3% to 5% transfer fee, it's still possible for many consumers to save money if they pay off all or even most of the transferred amount during the low-interest period,” says Sullivan.
Cons
Credit score requirements: Typically, 0% balance transfer offers are only for borrowers with strong credit scores. If you don’t have great credit, you may not qualify.
Expiration of the promotional period: After the introductory promotional period is over, the offer expires, and the “regular” interest rate kicks in on any remaining balance you have left on the credit card.
Balance transfer fees: Credit cards often charge a fee of 3% to 5% of the amount of the balance transfer, which can get expensive if you have a lot of credit card balances to move over.
“Unfortunately, many consumers don't take advantage of the introductory period and save very little or nothing. Many use the new card for purchases, thereby causing payments to go to purchases rather than the transferred amount.
Others may use the new card as intended but continue to use the paid-off card, thereby increasing their debt rather than decreasing it,” says Sullivan.
Debt Consolidation vs. Balance Transfer Card: How to Choose
Whether a debt consolidation loan or a balance transfer credit card is right for you depends on several key factors.
When to Choose a Debt Consolidation Loan
Debt consolidation loans are generally better in the following scenarios:
- You have multiple debts: Debt consolidation loans allow you to easily combine different types of debt, including credit cards, personal loans, medical debt consolidation, and more.
- You want predictable payments: These loans offer consistent terms with fixed interest rates and monthly payments that won't change throughout the repayment period.
- You prefer a fixed repayment timeline: With set terms typically ranging from two to five years, you'll know exactly when you'll be debt-free (and most lenders don't penalize early payoffs).
- You need to borrow a large amount: Personal loans often provide amounts up to $50,000 or even $100,000—far higher than typical credit card limits, which could damage your credit if maxed out.
"If you recognize that you have a spending issue, a personal loan may be your better option. With fixed payments and no temptation to use a new line of credit for purchases, it is often the safer choice for troubled consumers," says Sullivan.
When to Choose a Balance Transfer Credit Card
Balance transfer credit cards are generally better in the following scenarios:
- You qualify for 0% APR offers: With good credit, you can access the lowest possible interest rate—potentially 0% for a promotional period—saving significant money on interest.
- You can find no-fee transfers: Some credit cards offer free balance transfers as long as you complete the transfer within a certain time frame after you get your card. This can save you money in fees.
- You only have credit card debt: Credit cards tend to have less flexibility in the type of debts you can consolidate. However, if you only need to consolidate credit cards, a balance transfer card is a solid option.
- You can pay off debt quickly: If you can eliminate the transferred balance before the promotional period ends, you'll avoid interest entirely, unlike loans that charge interest from day one.
- You're monitoring your credit score: Be aware that using too much of your credit limit can temporarily increase utilization and impact your score, though this effect decreases as you pay down the balance.
"If you have a debt issue due to an illness or job loss but typically have no spending issues, you might benefit from the advantage of credit card consolidation. With discipline, a consumer can save money by aggressively paying down debt," says Sullivan.
Bottom Line
Both debt consolidation loans and balance transfer credit cards simplify your finances by combining multiple debts into one payment, potentially saving you money through lower interest rates.
Choose a balance transfer card if you primarily have credit card debt and qualify for a 0% APR offer, and you can pay off before the promotional period ends. Opt for a consolidation loan if you need to combine various debt types or prefer the predictability of fixed payments with a structured payoff timeline.
Frequently Asked Questions
Is debt consolidation the same as a balance transfer?
No. Balance transfers are just one method of debt consolidation, where you move multiple credit card balances to a single card. Debt consolidation also includes options like personal loans, which offer fixed interest rates and monthly payments.
Does doing debt consolidation hurt your credit?
Yes, temporarily. Debt consolidation can cause a short-term credit score drop due to hard inquiries and potentially lowering your average account age. However, making on-time payments and reducing your overall debt will typically improve your credit score over time.
Does using a balance transfer card hurt your credit?
It depends on your utilization. A balance transfer card can hurt your credit if it increases your credit utilization ratio too high. However, if you make timely payments and steadily reduce your balance, balance transfers often improve your credit score in the long run.
