Balance Transfer Card or Personal Loan
Making a credit card balance transfer and taking out a personal loan are two practical ways to save money as you pay off a credit card.
Which is better?
That depends on several factors, especially the difference in interest rates between the new credit card and the loan. It’s not always a simple calculation. Here’s an expert’s guide to help you pick the better debt consolidation strategy.
What Is a Balance Transfer Card?
A balance transfer card is a new credit card that allows you to move debt from your current credit card. In fact, many transfer cards let you move debt from multiple other credit cards to the new one.
The goal, of course, is to remove the money owed on a card that has a higher interest rate and put it on this new card. And the hope is that the new card has an introductory 0% annual percentage rate (APR) for at least 12 months, and you will be able to pay off the balance in that introductory time period.
The zero-rate period is key to a successful balance transfer strategy. With it, you buy time to make a big dent, or eliminate your debt without paying extra fees or exorbitant interest.
Some balance transfer providers may charge a transaction fee of 3%-5% of the transferred amount. And the more balance transfers you make, the higher the fees. Fortunately, this cost might be the only one you incur by consolidating debt this way, provided that you have zero balance at the end of the 0% introductory APR window.
Advantages of a Balance Transfer Card
The advantages of a balance transfer card start with the low APR, which typically is zero. When you’re paying off debt, it doesn’t get any better than 0% interest.
The big advantages of opening a new balance transfer account are:
- Your credit use ratio can improve by adding this type of revolving credit line
- 0% intro APR balance transfers have an interest-free debt repayment window
- You may get new purchase offers or other promotions that come with many balance transfer cards offering 0% intro APRs.
- Credit card bank transfers often have lower minimum monthly payment amounts, which can relieve you of some financial pressure
“It’s not a one-size-fits-all answer,” said James Allen, a certified financial education instructor and founder of Billpin.com. “It’s like getting a temporary reprieve from the interest monster. But remember, these offers don’t last forever, and once the honeymoon period is over, you could be looking at a higher interest rate than you were originally dealing with. Plus, there’s often a balance transfer fee to consider, which can add to your debt.”
With the 0% introduction APR options, your balance is not subject to any interest charges if you can pay back all the debt in that introductory period. In contrast, personal loans may attract rates of 7% or higher without an interest-free window.
If you can make your monthly payments on time and at least the minimum amount, you’re almost certain to raise your credit score. Opening the account creates a new opportunity to use and repay credit. You establish a better credit utilization ratio (CUR). That affects the FICO score lenders look at when evaluating your credit worthiness.
Disadvantages of a Balance Transfer Card
The disadvantages of a balance transfer card start with the fact that some of them don’t offer an introductory zero-rate APR. Another potential disadvantage is the short time period attached to whatever small introductory rate the card has.
Some cards have a 0% APR for six months, 12 months, 18 months, or 21 months. You normally want to lock into 0% for as long as possible, but sometimes banks don’t cooperate.
The major disadvantages of credit card balance transfer vs. a personal loan are:
- You need a stellar credit score (usually a FICO score of 680 or higher) to qualify for a credit card balance transfer.
- Balance transfer providers charge 3%-5% of the transferred amount to create the account.
- Balance transfers have a card limit that reduces the amount of debt you can consolidate.
- You have a shorter window, less than two years, to pay off your debt with your favorable terms. Personal loans may offer terms of five years or longer.
- If you can’t pay off your new credit card balance before the introductory APR period runs out, you could run into excessively high monthly interest payments (again).
Remember that an interest rate (or a higher one) kicks in for any remaining debt when the zero-rate window expires and is sometimes higher than other debt-relief options, so it’s important not to get lulled into a sense of security by the introduction period.
“Balance transfers can be advantageous when executed correctly,” said Branson Knowles, a certified financial planner, and head of U.S. digital banking for Top Mobile Banks. “By shifting debt to a card with lower interest rates, significant savings can be made in the long term. It’s vital, though, to factor in balance transfer fees and the interest rate post-promotion.”
If you make only minimal payments during the no-interest or low-interest card’s introductory period, you will end up owing more money in interest if you can’t pay off all (or a big chunk) of the card balance by that last month. You could blow all the savings you had in front of you.
What Is a Personal Loan?
A personal loan is one of the most common types of consumer loans offered by credit unions, banks, and non-traditional lenders like online and peer-to-peer providers. You can get a personal loan with collateral (secured) or without (unsecured) and not necessarily trigger a hard credit inquiry that could dent your credit score.
You can get a personal load in amounts from $1,000-$100,000 or more. When you get one, you can use the money for anything you want. That includes paying down medical bills, paying for a family emergency, paying tuition, paying off student loans and, yes, paying off or consolidating credit card debt.
Personal loans function just like most other loans. You have a set repayment period, usually 1-10 years, and a set repayment amount. The loan will come with APRs from 6% to 36%, based mainly on your credit score. The higher your credit score, the lower your APR should be, unless you have another risk factor involved, such as an outsized debt-to-income ratio.
Advantages of a Personal Loan
The advantage of a personal is its versatility: you can use the money for anything, not just credit card consolidation. The other advantage of taking out a personal loan is that it forces you to be disciplined. You have to make your monthly payments.
Benefits of using personal loan for credit card debt consolidation include:
- Repaying all your credit card debt with a personal loan can help improve your credit utilization ratio and FICO score. Eliminating all debt this way can create room for more credit card debt limit.
- A personal loan’s repayment structure provides a level of certainty for long-term planning.
- You can consolidate multiple or large credit card debts (up to $100,000 financing) with a personal loan.
- Longer personal loan terms (up to six years or more) allow borrowers to break down monthly repayments into more manageable amounts without increasing the interest rate.
- Preapproval for a personal loan doesn’t always require a hard credit inquiry, which can dent your credit score.
You can use a low-interest personal loan to consolidate large amounts of debt, including from multiple credit cards. Doing that can reduce the overall cost of your outstanding debt sitting on high-interest credit cards.
A loan also gives you longer a repayment period of 60 or more months — nearly triple the 21-month period granted by balance transfer cards. That can lower your monthly payment and help you generate momentum toward paying off your balance.
Having a loan also helps you maintain a level of financial certainty. Strict adherence to the financing structure allows you to zero out large debts on schedule.
Disadvantages of a Personal Loan
One disadvantage of a person loan is that no matter your interest rate, it’s almost sure to be higher than the APR on an introductory offer of a balance transfer card. That automatically makes it more expensive in the long term.
Much depends on your credit score. With excellent credit, you may qualify for an APR rate as low as 7% on a personal loan, but borrowers with scores below 650 often pay above 17%.
Here are other disadvantages of using a personal loan for debt consolidation:
- Personal loans don’t offer an interest-free period.
- Without a high FICO score, you may not get an unsecured personal loan, or your APR can be too high to be useful.
- Borrowers with poor credit may pay a high origination fee, in addition to a higher interest rate.
Finally, the highly rigid structure of a personal loan doesn’t permit flexible monthly payments. The loan may force you to pay more each month than you want to spend — and that amount won’t change for the life of the loan.
Should You Get a Balance Transfer Card or Personal Loan?
You can use a balance transfer card or a personal loan to help you get rid of outstanding debts. Either strategy can work. But the better one really depends on your habits and your specific financial situation, which includes your credit score and how much you can afford to pay every month toward the debt.
If you’re merging a large amount of debt and need several years to repay it, a personal loan might be your better option. Even a no-interest credit card might give you only 21 months of interest-free payments.
If you’re debt is smaller — to the point you think you can pay it off within 18-21 months — and you qualify for a no-interest credit card, that might be smarter.
But there’s another element to consider beyond interest rates and payoff projections. It’s this: what’s your financial behavior history? What got you into such a large debt in the first place, and why weren’t you able to manage it before?
Be honest about how you handle money and what you can change to avoid a “next time.” If you know you won’t be able to make a 21-month payoff period work, then look hard at getting a personal loan. But if a 21-month span is easy for you to pay off your balance, then a balance-transfer card is the answer.
But there are other considerations beyond the financial calculations.
Considerations for Choosing a Balance Transfer or Personal Loan
The best debt consolidation options come down to your existing debt and your financial circumstances. If you have an outstanding payday loan or medical bill, you can only use a personal loan to pay it off. A balance transfer won’t be allowed. Also, if you have a high CUR because of an existing credit card debt, you could bring the rate down to boost your FICO score by paying off the entire debt with a personal loan.
You’ll also need to get a loan if the debt you want to consolidate is more than $20,000. That’s because balance transfer cards come with debt ceilings. You can only put so much on them at any one time.
Your eligibility for either debt consolidation option largely depends on your FICO rating. If you have stellar credit, 690 or better, you may qualify for a 0% interest credit card balance transfer.
Typically, borrowers who are eligible for balance transfers more easily qualify for a personal loan because the latter has lower minimum credit requirements. Many lenders offer personal loans to customers with fair or bad credit scores below 690, but they might charge higher interest rates for it. They can also pre-qualify you for a debt consolidation loan without performing a hard credit pull that dents your creditworthiness.
But let’s assume you qualify for both credit balance transfer and personal loan debt consolidation — and that you determined you can save money either way. Comparing the rates that each option offers can help you make the final decision.
If you choose a balance transfer card with a 0% APR period and can pay off the debt within the promotional window, the entire deal might only cost you 3%-5% of the total debt transferred.
For a personal loan, consider the APR, which ranges from 6%-36%, and upfront loan processing fees ranging from 1%-10% of the loan amount. You might get a good deal on the APR if you have good credit or choose a longer repayment schedule.
Consider these factors to select the best way to consolidate debt between a credit card balance transfer vs. a personal loan:
- Are you consolidating an existing credit card debt, personal loan, or medical bills, etc.?
- Balance transfer card credit limit
- Your credit scores
- Your preferred loan structure (flexible vs. strict monthly repayments)
- Your preferred repayment duration
- Your existing debt amount
Speak to a Credit Counselor About Consolidating Your Debt
If you’re weighing a decision about getting a new credit card to transfer debt or taking out a personal loan, try credit counseling first. A credit counselor can check your match and listen to your circumstances and reasoning.
“In dire situations, professional help could be your saving grace, whether it’s turning to debt relief services or even bankruptcy,” said Leo Smigel, a personal finance expert and found of the personal finance site Analyzing Alpha. “It’s a delicate dance between managing your debt and fostering a healthy financial lifestyle.
“The key lies in understanding the nuances of each option, self-assessing your economic behavior, and tailoring your strategy to your unique situation. After all, isn’t the endgame a seamless journey to a debt-free life?”
Even with structured options like a personal loan, lenders may be flexible with the repayment time, APR, or any processing fees.
A counselor from a nonprofit credit counseling agency can try to negotiate more favorable rates or even fee waivers on your behalf, enabling you to lower the total cost of debt consolidation.
Whichever strategy you choose to consolidate your loans, remember the ultimate objective is to ease the financial pressure and not sink deeper into debt.
About The Author
Alan Schmadtke is the founder and president of MacGuffin Publishing, a content marketing firm in Central Florida. Prior to that, Alan was chief people officer at Launch That, for whom he spearheaded employee training and development, including seminars about the importance of retirement savings and adult money management. He also has vast experience as a reporter, editor and leader at the Orlando Sentinel. He lives in Cape Canaveral.
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