Should You Get a Balance Transfer Credit Card or a Debt Consolidation Loan? | Credit card

The average American credit card holder has a balance of $5,221, according to a report 2021 by the Experian credit bureau. While some pay off their entire balance each month, an August 2022 report from the American Bankers Association shows that about 41% of credit card holders have a balance from month to month.

Credit card debt can be expensive, with a annual average percentage rate about 15% to 25%, according to US News calculations. If you’re trying to get out of your balances, two financial products can help you do that: balance transfer credit cards and debt consolidation loans. Here’s what you need to know about both.

What is a balance transfer credit card?

A balance transfer credit card offers an introductory promotion with a 0% APR or a low APR that you can use to transfer and pay off the balance from another card. Depending on the card, the promotional period can range from 12 to 21 months.

While paying off credit card debt without interest is a great incentive, these cards often charge an upfront balance transfer fee, usually between 3% and 5% of the transfer amount. The card issuer will usually add the charge to your balance.

If you still have a balance at the end of the promotional period, the card will charge its regular APR on the remaining debt going forward.

“Customers are going to keep the card longer than this promotional period,” says Rachana Bhatt, executive vice president and head of distribution for credit cards, unsecured loans and personal loans at PNC Bank. “So it’s important to know what the current terms and fees are.”

Advantages and disadvantages of balance transfers

There are both pros and cons to using a balance transfer credit card to consolidate your credit card debt. Here’s what to consider before applying.


  • Interest savings. If you manage to pay off your entire balance during the promotional period, you could easily save hundreds of dollars.
  • Flexibility. Since it’s a credit card, you won’t have a fixed repayment term, which means you can adjust your payment as you see fit. Just make sure you pay at least the minimum due each month.
  • Simplify your payments. If you have balances on multiple credit cards, you can transfer them all to your new balance transfer credit card, which will end up with one monthly payment instead of multiple payments.

The inconvenients

  • Balance Transfer Fee. While you can make significant interest savings, you’ll need to consider the cost of the upfront balance transfer fee and how it compares to the cost of other debt consolidation and repayment options.
  • Credit requirements. You will generally need good credit to be approved for a balance transfer credit card, which means this option may not be available if your credit score is below 670. Even if it exceeds this threshold , card issuers will consider various factors and approval is not guaranteed.
  • Credit limits. Credit card issuers don’t release credit limits until they approve your application and open your account. As such, there is no way of knowing in advance whether you will qualify for a high enough limit to transfer all of your debt. If the limit is not high enough, you may need to look for other options to pay off all of your debt.
  • Risk of indebtedness. If you can pay off your balance within the 0% APR period, a balance transfer credit card can add a lot of value. But if you don’t stick to your repayment plan or run into unexpected difficulties along the way, you can still end up with high-interest debt after the promotional period ends.

What is a debt consolidation loan?

A debt consolidation loan is a personal loan that you can use to pay off credit cards and other types of debt. These loans don’t offer a low introductory rate, but can give you a more stable repayment plan.

Since September 2022, personal loan interest rates vary from about 4% to 36%, depending on the lender and your creditworthiness. Repayment terms generally range from one to seven years.

Some consolidation loans come with origination fees, but this is not always the case. If you apply with a lender that charges one, the origination fee can be as high as 8%. If there are origination fees, they are usually deducted from your loan disbursement, requiring you to borrow more to consolidate your total debt amount.

“For a debt consolidation loan to work, you also need to address the underlying bad spending habits or financial issues that put you in debt in the first place,” says Andrew Latham, Certified Financial Planner and Chief Content Officer at SuperMoney. . “Some fall into the trap of maxing out their credit cards as soon as the consolidation loan pays off their balance.”

Advantages and disadvantages of debt consolidation loans

As with balance transfer credit cards, consolidation loans have both advantages and disadvantages to consider before proceeding. Here’s what to keep in mind.


  • Structured repayment. If you’re struggling to stick to a payment plan with your credit card, having a fixed repayment term with a personal loan could help you avoid staying in debt longer than necessary.
  • Potentially lower interest rate. You won’t get a 0% introductory APR with a consolidation loan, but you may be able to get a lower interest rate than what you pay on your credit cards.
  • Higher loan amounts. You can usually get a higher loan amount with a personal loan than with a credit card limit. If you have a lot of credit card debt that you want to consolidate, a personal loan may be a better choice.

The inconvenients

  • Assembly costs. Some lenders charge origination fees that require you to borrow more. They can also reduce the potential savings you might get with a lower interest rate.
  • Credit requirements. There are personal loans available to consumers across the credit spectrum. But if you want an interest rate that beats your credit cards, you may need good credit or better to get approved.
  • Higher monthly payments. You can generally expect higher monthly payments on a personal loan than you would get with a minimum credit card payment. Make sure you can afford your new monthly payment before you commit.

When to choose a debt consolidation loan

When it comes to paying off your credit card debt, there is no one-size-fits-all solution. Evaluate your situation and your goals to determine if you should get a balance transfer credit card or a consolidation loan or if you should go another route.

“It’s important to look holistically at the entire value proposition before making a decision,” says Bhatt.

“Consolidating your debt with a 0% APR balance transfer card sounds good in theory,” says Latham, “but it can get tricky with larger amounts.”

If you have tens of thousands of dollars in debt, you may have a better chance of consolidating it all with a loan than with a balance transfer card. And payments can be more affordable if your loan terms are longer than the introductory period for a balance transfer card.

A personal loan may also be a better option if you’re worried about adding the temptation of another credit card or if you’re struggling to stick to your debt repayment plan with additional credit card payments.

When to Choose a Balance Transfer Credit Card

If you have a lower balance and want to pay it off within a card’s interest-free period, you might consider getting a balance transfer credit card. This option may also be worth considering if you have no problem committing to your own repayment plan and want to maximize your interest savings.

If you choose a balance transfer card, do everything you can to pay off as much of your debt as possible before the benefit expires. “If you just use it as a band-aid to postpone the inevitable, you could end up with more credit card debt at the end of the promotional period than at the beginning,” Latham says.

What alternatives are available?

Balance transfer credit cards and consolidation loans are good options to help eliminate your debt, but they may not be right for you. Here are some potential alternatives that may help:

  • Leverage home equity. If you are a homeowner and have significant equity in the property, you may be able to leverage the equity in your home through a home equity loan, home equity line of credit Where cash refinance. These options may have lower interest rates, but they may also have high closing costs, and you risk losing your home if you fall behind on your payments.
  • 401(k) loan. Borrowing when you retire doesn’t require a credit check, and all the principal and interest you pay goes back into your 401(k) plan. However, there may be tax consequences if you cannot repay the debt, especially if you leave your employer and have an accelerated repayment plan.
  • Debt management plan. If you’re struggling to keep up with payments and your credit is in poor shape, a nonprofit credit counseling agency can help you with a debt management plan. For a modest upfront and ongoing fee, credit counselors can help you get a lower monthly payment and interest rate and pay off your debt over three to five years. However, you may need to cancel your credit cards to be approved, which can damage your credit.

In many cases, people incur credit card debt due to circumstances beyond their control, such as medical bills, divorce, unemployment, and other factors. However, if your spending habits have contributed to your situation, consider setting a budget and looking for ways to reduce your spending to avoid falling back into old habits. This is the best long term solution.

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