Credit Card Balance Transfers vs Personal Loans

Pros and cons of personal loans vs balance transfer cards

When you are looking to consolidate all or some of your current debts, you have two main options. You can take out a personal debt consolidation loan or you can try to apply for a new 0% APR credit card and simply transfer all your balances to the new card. Balance transfer credit cards typically come with a 0% introductory rate for a period of 12, 18, or 24-months depending on the credit card type and the company issuing the card. In addition to these two main options, you have a third option of doing both.
Doing both can help if you cannot qualify for a large enough loan to consolidate all of your debts or if you have too much debt to be covered by the credit limit set by the credit card company and you need a personal debt consolidation loan to cover the rest. If you can get a few thousand dollars credit limit on a balance transfer card for a period of 18 or 24-months, you can then pay back the largest chunk of your current debt balance with zero percent interest while putting the smaller portion of your debt on the personal loan that is going to come with some sort of interest rate that can range anywhere from 4% to 36% depending on your credit situation.
Whichever option you choose, you should be fully aware of the pros and cons of both personal debt consolidation loans and balance transfer credit cards when it comes to debt consolidation.
Personal debt consolidation loans
A personal debt consolidation loan may be a good option if you are looking to take all your different monthly debt payments and combine them into one easy monthly payment. You can lower your monthly payment amount by extending the term of the loan over a longer period of time. Doing so can greatly reduce the amount of money you are spending each month on debt payments, however, you may end up paying more interest over a longer period rather than paying less interest over a more short-term debt consolidation loan. In some cases, paying a bit more interest over time may be worth the expense if it means you can lower your monthly payment and build up a good amount of savings each month. Here are some of the pros and cons of choosing a personal loan to consolidate your current and past debts.

Pros:

You could reduce your interest rate: Most often personal loans may come with a lower interest rate than what credit card companies offer on their credit cards. If you lock in a lower interest rate for a personal loan and then use the loan to pay off all of your credit card debt, you could save hundreds or thousands of dollars in interest over the life of the loan. The same thing applies to other loans. Maybe you have been working hard to improve your credit score, and since you last applied for a loan, you have increased your credit score enough to qualify for a loan with a much lower interest rate than past loans. You can use the funds from the debt consolidation loan to also pay off other older loans with higher interest, and simply pay the new loan off with monthly payments at a much lower interest rate.

You could have a defined pay-off date: When you have several credit cards, you may notice that there is no defined date that the credit card will be paid in full. This is why they are called revolving lines of credit. If you simply make the minimum payments and you are charged interest each month, you metaphorically will be taking two steps forward and one step backward for a long period of time that could end up costing you thousands of dollars in interest charges over the course of a few years. With a personal debt consolidation loan, you can pay off all those revolving lines of credit and know that at the end of the loan term, whether it's 24 or 36-months or some other period of time, your debt will be completely paid off if you do not miss any payments. If you do pay off your credit cards, be careful not to max them out again with new spending.

You could increase your credit score: By consolidating all of your debts into one personal loan, you can help to build your credit score by making consistent on-time payments and by bringing down the total amount of debt that you have.

Cons:

You could pay a higher interest rate: If you are seeking a debt consolidation loan because you have taken on too much debt, there is a chance that your credit score has dropped significantly. If this is the case, there is no guarantee that you will be able to qualify for a personal loan with a lower interest rate than your previous loans and credit cards.

You could pay more interest over time: If you consolidate all of your debt onto a single debt consolidation loan and you extend the repayment period out a good number of years, you may end up paying more in interest over time than if you would have just tried to pay off the debts you had each individually one-by-one.

There may be fees: Sometimes loans can come with origination fees and early pay-off penalties. When searching for a personal debt consolidation loan, you should consider that and be sure to factor in the added costs into the cost of your debt consolidation.

Balance transfer credit card

Balance transfer credit cards are cards that credit card companies offer to borrowers with decent credit to get them to become one of their customers. In some cases, your existing credit card company may have balance transfer offers, it's worth checking. The cards usually contain promotional and introductory rate programs that may look something like 0% APR for 18-months. When a consumer opens one of these credit cards, they may have a unique opportunity to consolidate all their other credit card debt onto one card with a 0% APR. Whatever the promotional period is, 12, 18, or 24-months, the consumer then has that amount of time to pay off as much of the debt as possible without accumulating any interest. The only catch is that credit card companies typically charge a 2% or 3% balance transfer fee on the total amount being transferred onto the new card. However, it is a one-time fee, and when you compare it to credit card APRs that can be as high as 24.99%, 2% or 3% is not so bad. Here are some of the pros and cons of using a balance transfer credit card to consolidate debt.

Pros:

Consolidate monthly payments: If you have multiple credit cards with multiple due dates and various interest rates, it could be difficult to keep track of when payments are due and when credit cards will be paid off. By consolidating all your different credit cards onto one account, you can easily keep track of when one simple monthly payment is due. You can also give yourself to the end of the introductory period to pay off the entire credit card balancing giving you a predetermined pay-off date to strive for in order to become debt-free.

Save money on interest: By consolidating all of your high-interest credit cards onto a new 0% APR credit card, you have a unique opportunity to pay off all of your credit card debt while being charged zero interest.

Cons:

Balance transfer fees: Balance transfer credit cards charge a fee of anywhere from 2% to 5% of the total balance being transferred onto the card. For example, if you are moving over $5,000 onto a new 0% APR balance transfer card that charges a 3% balance transfer fee, then you will be charged $150 to complete the transfer.

Could make debt matters worse: One giant mistake that some consumers commit is that they open a brand new 0% APR credit card and use it to clear their current credit card debts from their current credit accounts. Once their old credit cards are paid off, their credit lines are wide open and they begin to charge on the cards again. This could lead to digging yourself into even deeper debt than when you first started the debt consolidation process.

Consolidating your debt successfully

If you are looking to consolidate your debt successfully, then you should consider that it is not only a debt consolidation loan or a balance transfer card that is going to help you. You also need to help yourself by examining what kind of behaviors and spending habits got you into your situation in the first place. Where are you spending too much money? Are you dining out and spending too much money on entertainment each month? Do you like to consistently buy new clothes from the latest trends? Do you spend a lot of money on video games and computer parts? No one is pointing fingers and we all deserve to treat ourselves, however, if you are facing problems stemming from excessive debt, you may need to cut back a bit in a few places to ensure you can keep yourself on track financially.

Advantages to using a personal loan

One of the greatest advantages of using a personal loan to consolidate debt is that you can build up your credit score while paying down your debt. Once you take on a new debt consolidation loan and start paying that easy single monthly payment, as long as you make that payment on time each month, you can do wonders to improve your credit score. Payment history accounts for 35% of your total credit score, so with each on-time payment you make, and if you eventually pay off the loan with a 100% on-time payment history, then you may see a good bump to your credit score.

Disadvantages to using a personal loan

One disadvantage about debt consolidation loans that you should watch out for is the temptation to lock in the lowest monthly payment possible. When you are making various monthly payments to different creditors for different amounts, you may actually be paying quite a bit of your take-home pay each month to cover those payments. It may be tempting to get a debt consolidation loan to spread all those debts out over 5 or 7-years, but by doing so, you could end up paying a lot more interest in the long run than if you would have simply kept paying all the different payments each month.

When might a personal loan be a better choice for you than a balance transfer card?

A personal loan may be a better choice for you if you have other debts that you would like to consolidate that maybe do not accept credit cards as payment. A personal debt consolidation loan can give you cash in your personal checking account that you can use to pay credit cards, other loans, and whatever other debts you need to pay off. Having the cash in your hand gives you more flexibility about who receives some of the money and how much they receive.

Advantages to using a balance transfer card

By far one of the biggest advantages to using a balance transfer card is the 0% APR introductory rate that typically comes with it. When you take out a personal loan, you will be paying interest on the loan amount from day one. With a balance transfer card, you can get a grace period of 12, 18, or 24-months where no interest will accumulate on your existing debt. That grace period may be enough time to become totally debt-free.

Disadvantages to using a balance transfer card

One of the biggest disadvantages to using a balance transfer card to consolidate debt is the balance transfer fee. Any balances that are transferred from one account onto the new card can come with a balance transfer fee between 2% and 5% of the total balance. Although you may be hit with this fee, it is nothing compared to the 24.99% APR you may be paying on your older credit account. In addition, if you fail to repay the balance within the promotional period, you can be charged high interest rates. In some cases, the lender may even backdate the interest applied to the date you opened the account and transferred the balance.

When might a balance transfer be best?

Balance transfer credit cards may be best if all the debt you are looking to consolidate is credit card debt and you are given a 0% introductory rate on your new card. The 0% introductory rate can give you some time to pay off your current credit card debt without being charged interest at the same time. Additionally, credit cards may offer fly miles, cash rewards, and other perks that you can capitalize on whereas a personal loan gives you nothing in return except interest charges.

Can you have a personal loan and a balance transfer at the same time?

Yes, it may actually be beneficial to use both a personal loan and a balance transfer card at the same time. The only problem is whether or not you have the credit score to qualify both for a personal loan and a new 0% interest credit card at the same time. If you do, then you can max out the 0% APR credit card to get as much debt consolidated as you can with the 0% interest rate, and whatever debt is left over, can be consolidated into the personal loan.