Debt consolidation can be a great way to save money and pay down debt, especially high-interest credit card debt. Debt Consolidation Loan vs. Balance Transfer Credit Cards are two options to consider. What is the best one for you?
Balance transfer credit cards let you transfer debt from other sources and often have introductory periods with 0% interest. Debt consolidation loans are unsecured personal loans that can have lower interest rates than other types of debt. Both balance transfer credit cards and debt consolidation loans can help pay down debt and save money. However, it’s important to compare your options and choose the one that is right for you.
When Consolidating Debt, Consider These Six Factors
There are a few things to consider when you’re trying to consolidate your debt. You need to be sure that you’re committed to a strategy that will prevent you from racking up more debt. Depending on your circumstances, picking the right option could save you thousands of dollars or make the process much simpler. Keep these things in mind as you weigh your options.
When you are considering whether to consolidate your debt with a loan or balance transfer credit card, there are several factors to take into account. The amount of debt you have is one important factor, but there are others to consider too. Here are six things to think about when making your decision.
1. Interest Rates
When it comes to credit cards and debt consolidation loans, the first thing you should look at is the interest rate. Balance transfer credit cards usually offer an introductory period with no interest, but the rates after that are generally higher than personal loan rates. This is especially true for people with good credit.
As of July 20, 2022, the average interest rate for a personal loan is about 10.60 percent, while the average credit card interest rate is hovering above 18 percent. This means that it can be quite difficult to find an interest-free personal loan. Even with good credit, you may only be able to find a personal loan with an interest rate in the single digits.
The length of the 0 percent interest period for a balance transfer credit card is an important factor to consider. Determine your total amount of debt and the average payment you would need to make to pay it all off before the 0 percent interest period ends. For example, if you have $5,000 in credit card debt and 0 percent APR for 18 months, could you afford to pay $278 per month during that timeline to become debt-free?
A balance transfer card could be right for you, provided you can afford the monthly payments to clear your debt before interest kicks in. Conversely, a personal loan might be a better option for you, depending on the interest rate.
The reason this is important is that the interest rate you pay on a loan has a direct effect on your monthly payment. Thus, by choosing an option with a lower interest rate, you can keep your payments down and have a better chance of paying off your debt.
Balance transfer offers usually come with a one-time fee. This can amount to 3 to 5 percent of the total debt you transfer. Keep this in mind when considering a balance transfer.
Assuming you have good credit, transferring $5,000 to a new card with a 0 percent intro APR and no balance transfer fee could save you hundreds of dollars in interest charges over a year. This is especially true when compared with taking out a 12-month personal loan at 11 percent APR, which would leave you paying nearly $303 in interest.
Personal loans can be a great way to get the money you need, but it’s important to know that some of them may charge a loan origination fee. This is a one-time charge that is taken out of the total amount you receive, but it’s typically not charged by banks or credit unions.
Origination fees can add up quickly, especially on larger loans. In some cases, these fees can be as high as 8 percent of the total loan amount. For example, on a $5,000 loan used to consolidate credit card debt, the origination fee could be $400, leaving you with a balance of only $4,600.
3. Fixed Rates And Payment Schedule
One of the biggest advantages of consolidating debt with a personal loan is that you will have fixed payments each month. This can make budgeting much easier because you will always know how much you need to set aside for your loan payments. Another benefit is that the interest rate on a personal loan is usually lower than the interest rate on credit cards. This means that you will save money over time by consolidating your debt with a personal loan.
When you are trying to pay off debt, it is important to find a repayment strategy that works for you. Some people prefer the certainty of fixed monthly payments with a personal loan, while others prefer the flexibility of a balance transfer credit card. Consider your situation and preferences to decide which option is best for you.
4. Credit Score Impacts
Applying for a new credit card and transferring your balances to it could potentially hurt your credit score. This is because your credit utilization ratio on that card would be close to 100%, and credit-scoring models negatively emphasize revolving debt. So, continually transferring your debt from one card to another could further lower your score.
One potential benefit is that your credit utilization rate could go down to 0 percent, which could help improve your credit score. However, you are still technically in debt – just with one lender instead of multiple lenders. It’s important to make timely payments on your loan to avoid damaging your credit score.
5. Credit Requirements
Debt consolidation loans and balance transfer credit cards can be a great way to save money and improve your financial situation. Lenders in both spaces typically offer the best rates and terms to individuals with very good or excellent credit. However, even those with “good” credit scores (FICO scores from 670 to 739) may be approved for either option depending on the lender.
It can be difficult to find a balance transfer credit card with a low credit score. However, some secured credit cards come with balance transfer offers. These cards may not have 0 percent APR for a limited time, but they do require a cash deposit as collateral.
Even though your credit score may not be in the best shape, you can still qualify for a debt consolidation loan. Keep in mind, however, that you may end up paying a higher interest rate. But consolidating your debts could help you save money in the long run – as long as your new interest rate is lower than the rates you’re currently paying.
6. Types Of Debt
Debt consolidation loans and balance transfer credit cards can both be helpful options when you are trying to pay off debt. However, it is important to think about the types of debt you have when you are comparing these two options.
Generally, debt consolidation loans are a good option for consolidating multiple types of debt. This is because you will receive a lump sum of money upfront that you can use to pay off medical bills, credit card bills, payday loans, and any other debts you have.
By contrast, balance transfer credit cards can be a great option as they typically only allow you to consolidate other credit card balances. Additionally, these types of cards usually have shorter introductory periods during which interest rates are lower, making them ideal for paying down smaller amounts of debt. However, it’s important to do your research and make sure you understand the terms and conditions of each card before applying.
Debt Consolidation Loan vs. Balance Transfer Credit Card
It is important to understand that each option works best in different situations and for different types of consumers. By taking the time to understand your unique financial situation, you can make the best decision for your needs.
When Debt Consolidation Loans Tend To Work Best
- People who need to pay down debts over a long period, or up to 10 years.
- Anyone who wants the security of a fixed interest rate and fixed monthly payment.
- People need to stop using credit cards due to the temptation of overspending.
When Balance Transfer Credit Cards Tend To Work Best
- Anyone who has a small amount of debt that they can completely pay off during their card’s 0 percent APR introductory period, which will likely last 12 to 21 months.
- People who have the discipline to stop using credit cards even after signing up for a new one.
A loan or a credit card with a balance transfer are the two options for consolidating debt. No matter which course of action you take, you must have a plan in place to get out of debt. Understanding how to live on less is the key to success.