Personal Loans

Debt consolidation loan vs. balance transfer card: Which is better?

By
Social Links for Jacqueline DeMarco ,
edited by
Social Links for Kelly Larsen
Published July 5, 2023, 9:57 a.m. ET
Couple smiles after successfully consolidating their debt
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Debt consolidation loans and balance transfer cards are two options that can make repaying debt more manageable.

A debt consolidation loan allows you to take out a loan to repay your various debts, while a balance transfer card lets you transfer your credit card balances to one card — often with a temporary 0% interest rate — and have a single monthly payment.

What is a debt consolidation loan?

With a debt consolidation loan, a type of unsecured personal loan, you combine multiple sources of debt into one easy-to-manage loan with a fixed monthly payment. You receive a lump sum of money upfront, then repay the loan over a set term. If you’re struggling to keep up with multiple payments and due dates every month, you may find having just one loan to repay much more convenient. 

Debt consolidation loans can potentially come with lower interest rates than the ones you currently pay. As a result, you may save a considerable amount of money each month, which can make it easier to pay off your debt. If you can wait a bit, boosting your credit score before applying for a debt consolidation loan can improve your odds of qualifying for a lower rate.

It’s a good idea to compare different debt consolidation loan options to find the lender with the best rates and terms for your financial situation. Some lenders charge an origination fee for processing your loan, which can be as high as 10% of your loan amount. You may also come across late fees and prepayment penalties, so review the terms carefully before signing the loan agreement.

Pros and cons of debt consolidation loans

There are some advantages and disadvantages to debt consolidation loans, including: 

Pros

  • More streamlined debt repayment: Being able to focus on one monthly debt payment, with a fixed amount and payoff date, can simplify the debt repayment process.
  • Potentially lower interest rate: When you consolidate your debt using a debt consolidation loan, you may qualify for a lower interest rate than the average of the rates you’re currently paying.
  • May improve credit score: Having more manageable debt payments can make it easier to make consistent on-time payments and pay down debt, both of which can improve your credit score.

Cons

  • May not qualify: If you have bad credit, you may not qualify for a debt consolidation loan with a low interest rate. 
  • May not curb spending: Consolidating your debt with a loan can help, but if you continue to rack up charges on your credit card, you may find it difficult to get out of debt. 
  • Longer repayment terms require more interest: Choosing a longer repayment term will likely give you a lower monthly payment, but you’ll pay more in interest over time. 

What is a balance transfer card?

With a balance transfer credit card, you transfer your existing credit card balances to a new credit card or one you already have. This can be a great way to potentially save money on interest, as many credit card companies offer introductory 0% interest rates on new balance transfer cards. These promotional periods can often last up to 21 months or more.

If you’re able to repay your credit card debt during the promotional period, you can save a lot of money on interest. However, once the promotional period ends, the interest rate on your balance transfer card will increase to its regular rate. This rate may be higher than the rate you were paying on your old cards, which can make your payments higher if you still have a balance. 

Additionally, when you transfer a balance to a new card, you usually must pay a balance transfer fee, which can be a percentage of the amount you transfer or a flat fee. This fee may negate any benefit you get from the card, so keep this in mind.

Finally, if you’re over 60 days late on a payment, your card issuer may increase your interest rate on both new balances and your transferred balance, which can make it even more difficult to pay off your debt.

Pros and cons of balance transfer cards

There are also benefits and downsides to using a balance transfer card to consolidate credit card debt:

Pros

  • Avoid paying interest during promotional period: A balance transfer card may offer a 0% interest introductory period. This can help you save money on interest charges.
  • May pay off debt faster: Saving money on interest (especially if you get a 0% promotional rate) can help you put more money toward your actual debt. You may be able to pay off your debt faster this way. 
  • Potential credit score benefits: Consolidating your debt onto one card can help lower your credit utilization ratio (your total card balances divided by your total credit limit), which is a factor in your credit score. Lenders prefer to see that you have a low credit utilization ratio (often 30% or below), since this indicates you have more room in your budget.
    Opening this new account can add to your available credit, which can lower your ratio. Additionally, making on-time payments can positively impact your credit score.

Cons

  • Fees. Balance transfer cards can have fees, like a balance transfer fee or an annual fee. Be sure to carefully review the terms and conditions of the card to understand what any potential fees may cost you.
  • The promotional period is limited. The promotional period for the reduced interest rate or 0% interest may only last for a certain amount of time, after which the interest rate may increase significantly.
  • Tricky approval requirements. Balance transfer cards often require a good credit score in order to be approved. If you have a low credit score, it may be difficult to qualify for a balance transfer card.

When does a debt consolidation loan make sense?

A debt consolidation loan may make sense if it has a lower interest rate than your current debt payments. If you have a less-than-ideal credit score and can’t qualify for a low-interest rate, it may not be worth it. 

When does a balance transfer card make sense?

If you’re able to pay off your debt during the 0% interest introductory period, a balance transfer card can be a great option. However, if that’s not feasible and the card has an expensive balance transfer fee, this may not be the best solution.

Alternatives to consider

If you decide that neither a balance transfer card nor a debt consolidation loan is the right choice for you, these are some alternatives you can pursue to get out of debt: 

  • Credit counseling: Credit counselors can help you build a budget and offer strategies to help you repay your debts. They’ll work closely with you to make a personalized debt management plan that works for you. You can find nonprofit credit counseling agencies through the National Foundation for Credit Counseling.
  • Call your creditors: If you’re struggling to make payments, call your credit card issuers. Explain your situation and ask if they offer hardship programs. With a hardship program, you may be able to pay less each month and get a temporarily lower interest rate. 
  • Debt repayment methods: If you feel you can tackle your credit card debt on your own, consider the debt avalanche and debt snowball methods. With the debt avalanche method, you pay off your credit card with the highest interest rate first, while making minimum payments on your other cards. After the first card is paid off, you move on to the card with the next-highest rate. With the debt snowball method, you focus on paying off your smallest balance first, while making minimum payments on your other cards. Once you pay off the first balance, you work toward repaying the next-smallest debt.