The average U.S. credit card holder has a balance of over $ 6,300, according to a 2017 report by the Experian credit bureau. While some pay off their balance in full each month, about 44% of credit card holders have a month-to-month balance.
Credit card debt can be expensive, with an average interest rate of around 16 to 23 percent, according to calculations by US News. If you’re trying to get out of your balances, there are two financial products that can help: balance transfer credit cards and debt consolidation loans. Here’s what you need to know about both.
Credit cards with balance transfer and debt consolidation loans
Depending on your situation, a balance transfer by credit card or debt consolidation loan maybe better than the other.
Balance transfer cards can help you pay off your balances interest-free, but you can pay a balance transfer fee, and the interest-free period doesn’t last forever. They are also usually designed just to pay off credit card debt, although some card issuers may allow you to consolidate other types of debt as well.
Debt consolidation loans, on the other hand, are personal loans that can be used to pay off credit cards and other types of debt. These loans do not offer a low introductory rate, but can offer you a more stable repayment plan.
To find out which one is right for you, compare their features side by side.
Costs: Balance transfer credit cards often charge a balance transfer fee, which is typically 3-5% of the amount transferred. Some waive fees for the first 60 days after opening the account. If there are any charges, they will be added to your new balance.
With some consolidation loans, you will pay an origination fee, which can be as high as 8%, depending on the lender. However, some lenders do not charge the fees, which saves you money. If there are any origination fees, they are usually subtracted from your loan amount, forcing you to borrow more to consolidate your full debt amount.
APR: When you get approved for a balance transfer credit card, your introductory balance transfer annual percentage rate is typically zero percent. Once the promotional period ends, however, it could increase by 20%, depending on the card and your creditworthiness.
âCustomers will keep the card longer than this promotional period,â says Rachana Bhatt, general manager of US branded cards at Barclays. âIt is therefore important to know the conditions and the current costs. “
It is essential that you pay off as much debt as possible, if not all, before the end of this period to avoid having to face high interest rates again.
The average interest rate for a two-year personal loan is 10.12%, according to Data as of August 2018 from the Federal Reserve. But depending on the lender and your creditworthiness, you might only qualify for a much higher rate than what you are currently paying.
Many personal lenders allow you to view rate offers without making an official request, but there is no guarantee that you will get a rate low enough to be worth it.
Credit Requirements: Most balance transfer credit cards require you to have good or excellent credit, which typically means having a FICO credit score of 670 or higher. If you do not qualify, you will not be approved for the card.
With a debt consolidation loan, an applicant with a fair credit score can still be approved by some lenders. But the catch is, you might not get an APR low enough to save money.
Access to money: If your credit card debt is above average, you may be having trouble with a balance transfer credit card, says Theresa Williams-Barrett, vice president of consumer loans and loan administration at Affinity Federal Credit Union in New Jersey.
“The amount of the transfer that consumers can get approved for depends on their credit limit,” she said, “although issuers may have other rules in place, such as a dollar limit on transfers.”
You can’t see your credit limit until you’ve applied and approved, making it difficult to know if a balance transfer card might work for you. You can request an increase in your credit limit after being approved, but there is no guarantee that you will get it.
The amount that you can claim with a consolidation loan can vary depending on the lender. Some lenders offer up to $ 100,000, which gives you plenty of room if you have a large credit card balance. Also, you may be able to see the loan amount you may be eligible for when you check your rate before you apply.
Repayment Terms : Credit cards don’t have a set repayment term, so you can only make the minimum payment or pay more each month to lower your balance. While you can have 12, 15, or 18 months to pay off your transferred balance before the promotional APR ends, you can choose not to. This provides flexibility, but some consumers may need the commitment of a regular payment to successfully repay their balances.
It is essential to have a payment plan in place with a balance transfer card. If you end up losing your motivation and resort to paying the minimum payment, you could end up with a lot of high interest debt.
On the other hand, consolidation loans come with set repayment terms, which typically range from two to seven years. This can give you more time to pay off your debt. You can spread your payments with a lower monthly payment than you would need to pay off your balance during the interest-free period of a balance transfer card.
âConsumers need to make sure they can make new payments consistently so they don’t fall back into debt,â Williams-Barrett says.
Credit impact: Whenever you apply for a credit card or loan, the lender will do a thorough investigation of your credit report, which can drop your credit score a few points. Additionally, opening a new credit account can reduce the average age of your accounts and affect the length of your credit history.
Where the two products diverge, however, is in their impact on your credit usage. This is the percentage of available credit that you use on your credit cards, and it represents 30% of your FICO credit score.
If you use a consolidation loan to pay off multiple credit cards, for example, your credit usage on those cards will drop to zero percent, which can improve your credit score. If, however, you use more than 30% of your balance transfer card’s credit limit, it could hurt your credit score. That said, paying off the balance will reduce your usage over time, which will have a positive effect.
Which option to choose?
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 whether you should get a credit card with balance transfer or a consolidation loan, or if you should go another route.
If you have tens of thousands of dollars in debt, you might have a better chance of consolidating everything 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 of a balance transfer card.
If, however, your balance is lower and you want to pay it off during a card’s interest-free period, you may want to consider getting a credit card with balance transfer. âIt’s important to holistically look at the entire value proposition before making a decision,â says Bhatt.
The most important thing you can do is consider the underlying reasons why you got into debt in the first place. If you have accumulated a lot of credit card debt due to a spending problem, moving your balances to a balance transfer card or debt consolidation loan might give you the incentive to increase your balances again. credit card.
Consider using cash or a debit card while paying off your debt, unless you can agree to pay all new fees with each statement period. Otherwise, you might feel like you’re spinning the wheels as you simultaneously repay and increase your debt burden.
Also, focus on ways to build good financial habits to avoid going into debt again. Budget appropriately and make regular payments. Set up automatic payment so you don’t miss any payments, and if you’re using a balance transfer card, schedule how much you’ll need to pay each month to clear your balance before the interest-free introductory period ends.
The key is to prepare yourself for success in paying off your debt, and then make sure you don’t have to start over.