The average American credit card holder carries a balance of more than $6,300, according to a 2017 report by credit bureau Experian. While some pay off their balance in full each month, roughly 44 percent of credit card holders carry a balance from month to month.
Credit card debt can be expensive, with an average interest rate of about 16 to 23 percent, according to calculations by U.S. News. If you’re trying to get out from under your balances, two financial products can help you do it: balance transfer credit cards and debt consolidation loans. Here’s what you need to know about both.
Balance Transfer Credit Cards vs. Debt Consolidation Loans
Balance transfer cards can help you pay off your balances interest-free, but you may pay a balance transfer fee and the interest-free period doesn’t last forever. They’re also generally designed only 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 don’t provide a low introductory rate but can give you a more stable repayment plan.
To find out which one is better for you, compare their features side by side.
Fees: Balance transfer credit cards often charge a balance transfer fee, which is typically between 3 to 5 percent of the transfered amount. Some waive the fee for the first 60 days after you open the account. If there is a fee, it’ll be rolled into your new balance.
With some consolidation loans, you’ll pay an origination fee, which can be as high as 8 percent, depending on the lender. Some lenders, however, don’t charge the fee, saving you money. If there is an origination fee, it’s typically subtracted from your loan amount, requiring 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 is over, though, it could be upward of 20 percent, depending on the card and your creditworthiness.
“Customers are going to keep the card for longer than that promotional period,” says Rachana Bhatt, managing director of U.S. branded cards at Barclays. “So it’s important to know what the ongoing terms and fees are.”
It’s crucial that you pay off as much debt as possible, if not all of it, before that period ends to avoid dealing with high interest rates again.
The average interest rate on a two-year personal loan is 10.12 percent, according to August 2018 data from the Federal Reserve. But depending on the lender and your creditworthiness, you could only qualify for a rate that’s much higher than what you’re currently paying.
Many personal lenders allow you to see rate offers without officially applying, but there’s no guarantee you’ll get a low enough rate to make it worth it.
Credit requirements: Most balance transfer credit cards require that you have good or excellent credit, which typically means having a FICO credit score of 670 or higher. If you don’t qualify, you won’t get approved for the card.
With a debt consolidation loan, an applicant with a fair credit score may still be able to get approved with some lenders. But the catch is you might not get a low enough APR to save money.
Access to money: If you have higher-than-average credit card debt, you may run into some problems with a balance transfer credit card, says Theresa Williams-Barrett, vice president of consumer lending and loan administration at Affinity Federal Credit Union in New Jersey.
“The amount of transfer that consumers can get approved for depends on their credit limit,” she says, “although issuers may have other rules in place, such as a dollar limit for transfers.”
You can’t see your credit limit until after you apply and get approved, making it tough to know if a balance transfer card can work for you. You can request a credit line increase after you’re approved, but there’s no guarantee you’ll get it.
The amount you can qualify for with a consolidation loan can vary by lender. Some lenders offer up to $100,000, giving you plenty of room if you have a large credit card balance. Also, you may be able to view the loan amount you might qualify for when you check your rate before applying.
Repayment terms: Credit cards don’t have set repayment terms, so you can make just the minimum payment, or pay more each month to reduce your balance. While you may get 12, 15 or 18 months to pay off your transferred balance before the promotional APR ends, you can choose not to. This offers flexibility, but some consumers may need the commitment of a regular payment to successfully pay down balances.
It’s essential to have a payment plan in place with a balance transfer card. If you end up losing motivation and resort to paying the minimum payment, you could end up with a lot of high-interest debt again.
On the flip side, consolidation loans come with set repayment terms, which typically range from two to seven years. That can give you more time to pay off your debt. You can spread out your payments with a lower monthly payment than you’d need to pay off your balance during a balance transfer card’s interest-free period.
“Consumers must ensure that they can make the new payments consistently to not fall back into debt,” says Williams-Barrett.
Credit impact: Every time you apply for a credit card or a loan, the lender runs a hard inquiry on your credit report, which can knock a few points off your credit score. Also, opening a new credit account can lower your average age of accounts and affect your length of credit history.
Where the two products diverge, though, is how they affect your credit utilization. This is the percentage of available credit you’re using on your credit cards, and it makes up 30 percent of your FICO credit score.
If you use a consolidation loan to pay off multiple credit cards, for instance, your credit utilization on those cards will drop to zero percent, which can help your credit score. If, however, you’ll use more than 30 percent of the credit limit on your balance transfer card, it could hurt your credit score. That said, paying down the balance will decrease your utilization over time, having a positive effect.
Which Option Should You Choose?
When it comes to paying off your credit card debt, there’s no one-size-fits-all solution. Assess your situation and goals to determine whether you should get a balance transfer credit card or a consolidation loan, or if you should go another route altogether.
If you have tens of thousands of dollars in debt, you may have a better chance consolidating all of it with a loan than you would with a balance transfer card. And payments may be more affordable if your loan terms are longer than a balance transfer card’s introductory period.
If, however, 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. “It’s important to look holistically at the whole value proposition before making the decision,” says Bhatt.
The most important thing you can do is consider the underlying reasons you got into debt in the first place. If you racked up a bunch of credit card debt because of a spending problem, moving your balances to a balance transfer card or debt consolidation loan might tempt you to run balances up again on your credit cards.
Consider using cash or a debit card while you’re paying off your debt, unless you can commit to paying off all new charges each statement period. Otherwise, it could feel like you’re spinning your wheels as you simultaneously pay off and add more to your debt burden.
Also, focus on ways to establish good financial habits to avoid going into debt again. Budget appropriately, and make regular payments. Set up autopay so you don’t miss any payments, and if you’re using a balance transfer card, plan how much you’ll need to pay each month to eliminate your balance before the interest-free introductory period ends.
The key is to set yourself up to succeed in paying off your debt, then ensure you don’t have to do it again.