Balance Transfer vs. Personal Loan

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High interest rates can make it difficult, if not impossible, to pay off debt.

In late 2022, the average interest rate on a credit card was over 19%. For perspective,  it would take you more than 8 years and cost you $2,831 in interest charges to pay off $3,000 in debt if you paid $60 a month at 19% APR.

Fortunately, you don’t have to be stuck paying high interest rates. If you have good credit, or even average-to-poor credit, you have a number of options for reducing interest charges, consolidating debt and paying off your balances, including personal loans or a balance transfer credit card.

What Is a Balance Transfer Credit Card?

When used wisely, a balance transfer credit card is a tool that can help you manage debt. That’s because they give you temporary relief from high credit card interest rates and other costly debt.

Balance transfer cards usually come with 0% APR for a limited period of time—typically the first year after you open the account. This timeframe is known as the introductory period.

Once you open the account, you can refinance your credit cards by transferring the debt onto the new card for a flat fee, and then pay down the debt without worrying about interest charges during the introductory period.

Pros of a Balance Transfer Credit Card

Using a balance transfer card might seem like an elaborate way to move debt around, but it can actually give you some financial relief.

That’s because every dollar you pay during the 0% APR period goes toward reducing your debt, instead of a portion covering interest charges.

These are the main benefits of using a balance transfer credit card:

  • No interest on your transferred debt: You won’t have to pay interest on the debt you transfer to the card during the introductory period.
  • Potential credit impact: A balance transfer can help you pay off your debt faster, which means you could see your credit scores improve sooner. Plus, having more available credit, without increasing your overall debt, also helps improve your scores.

Cons of a Balance Transfer Credit Card

Balance transfer credit cards aren’t without their drawbacks. Consider these main features before using a balance transfer card to manage your debt:

  • Transfer fees: You’ll be charged a fee for your transfer—typically 3%-5% of the total amount. In other words, if you transfer $3,000, you’ll be charged a fee of $90-$150.
  • Interest charges: You won’t pay interest on your balance during the introductory period, unless you add new charges. If you do so, you’ll be charged the full interest rate until every dollar you owe is paid off, including the transfer amount. You might also have to start paying interest early if you make late payments.
  • Credit score requirement: Your credit scores will help determine if you qualify for a balance transfer credit card. If your scores are below 670, you may have trouble qualifying.
  • Credit impact: Every time you apply for a new credit card you risk losing a few points from your credit scores. You can minimize the loss of points by making all of your applications for a new credit card within 14 days.

When Is It Best to Use a Balance Transfer Credit Card?

If your credit is good enough to qualify for a balance transfer card, and you need relief from debt payments or high APR, a balance transfer card is worth considering.

Before you transfer the money, make sure you can pay the balance transfer fee. You should also make a plan for how you’ll pay off the debt, ideally before the special introductory period ends. If paying off the debt in that timeframe doesn’t seem possible, reach out to a credit counselor for guidance and advice.

What Is a Personal Loan?

Another option for consolidating debt is to use a personal loan. With personal loans, you’ll borrow a lump sum of money from a bank, credit union or online lender, use it to pay off some or all of your credit card debt and then pay back the loan in monthly installments.

Like credit cards, personal loans come with interest charges and fees, but they work a little differently. Here’s what you should know before applying:

Pros of a Personal Loan

Taking out a personal loan can be a good strategy for paying off high-interest credit card debt. These are some of the ways a personal loan can be good for debt consolidation:

  • Relatively low interest: Personal loans generally have much lower interest rates than credit cards. In late 2022, the average APR on a personal loan was 10.64%, while it was nearly double that (19.04%) for a credit card.
  • Get a set, debt-payoff date: Unlike credit cards, you can’t keep charging up your balance on a personal loan, and you know up-front when your loan will be paid off, usually in 3-5 years.
  • Credit impact: Making monthly payments on a loan, and reducing your total debt, can improve your credit scores.

Cons of a Personal Loan

For some people, a personal loan may not be the best option for consolidating credit cards and other debt. Here are a few reasons to consider a different strategy:

  • Loan fees: Each lender has different fees for their personal loans, but they typically include an origination fee, a documentation fee and more.
  • Interest charges: Unlike a 0% balance transfer credit card, you’ll have to pay interest on your loan every month, and if you take out a variable APR loan, the amount you’re charged could be unpredictable.
  • Credit score requirements: Your credit scores will play a major role in determining what interest rate you qualify for. The lower your scores, the more likely you are to be denied a debt consolidation loan and the higher your interest rates will be if you are approved.
  • Other requirements: In addition to credit, lenders may examine your income, employment history and other details of your finances. Based on the review, some applicants can be deemed ineligible.
  • Credit impact: Every time you apply for a loan you can lose a few points from your credit scores. Like with credit cards, you can minimize the loss of points by making all of your applications within 14 days.

When Is It Best to Use a Personal Loan for Credit Card Debt?

A loan might be your best option for debt consolidation if it’s the lowest APR offer you can get. In other words, you should consider a personal loan if you are unable to qualify for a balance transfer credit card, or if you simply prefer not to open a new credit card account.

Combining Balance Transfer Credit Cards and Personal Loans

Another option for paying off debt is to use both a balance transfer credit card and a personal loan. Combining both might be a good strategy if neither of the new accounts gives you enough credit or cash to pay off all of your pre-existing debt.

If you use both, try to focus on paying extra toward the loan until your introductory APR period ends on the credit card.

Just note that taking out both a loan and a new credit card could mean double the fees and double the up-front hit to your credit, so make sure you’re ready to take on the expense, and the hit to your scores, before using this approach.

Speak to a Credit Counselor About Your Options

Still not sure what your best option is for paying off debt?

A non-profit credit counselor from InCharge Debt Solutions can help you explore all of your available options for consolidating and paying off debt, including balance transfer credit cards, loans and more. In addition to new financing, your counselor can help you explore whether a debt management plan, debt settlement or even bankruptcy is the best strategy for your situation.

About The Author

Sarah Brady

Sarah Brady is a Personal Finance Writer and educator who's been helping people improve their financial wellness since 2013. Sarah writes for Experian, Investopedia and more, and she's been syndicated by Yahoo! News and MSN. She is a workshop facilitator and former consultant for the City of San Francisco's Affordable Home Buyer Programs, as well as a former Certified Housing & Credit Counselor (HUD, NFCC).


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