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Balance Transfer vs. Debt Consolidation

Last Updated: September 29, 2023
4 min read

Key points about: balance transfer vs. debt consolidation

  1. Balance transfers benefit credit users because it lets them transfer debt from one credit card account to another one with a lower APR.

  2. Debt consolidation applies to combining many debts into one, sometimes by staking collateral against the debts owed.

  3. Exploring these strategies means understanding how each will impact your credit utilization, a significant contributing factor to your credit score.

Being saddled with debt can impact many areas of your life. It can hurt your credit score, which makes it harder to secure a car or home loan. It’s no wonder that many people are researching tactics to get out of debt faster. One common question debtors ask is, “What’s the difference between a balance transfer and debt consolidation?”

In simple terms, balance transfers are one form of debt consolidation. Both balance transfers and debt consolidation involve moving your debt from a higher-interest account to a lower-interest account in an attempt to pay off your debt at a lower interest rate. Balance transfers specifically involve credit cards, while debt consolidation is broader. For example, at Discover, you can apply for a balance transfer offer up to your available credit line to transfer high-interest debt from credit cards, loans, and more to save with a low promotional APR (if you’re approved). This may mean you transfer credit card debt from one or multiple cards to your Discover® Card with a promotional interest rate. However, you could also apply for a personal loan or home loan to consolidate your debt.

What is a balance transfer?

A balance transfer is when you take the balance of the amount you owe from one loan (such as credit cards, loans, and medical bills) and move it to another credit card account. People often use balance transfers to pay off debt at a lower interest rate. For example, if you carry a balance on a high-interest credit card and transfer it to a card with a lower interest rate, maybe even one with a 0% balance transfer introductory rate, you could pay down the balance more quickly because you’re paying less in interest charges.

However, understand that the APR will rise after the introductory period, so make sure you’re aware of what the standard APR will be. There may also be a balance transfer fee, so make sure to read the terms and conditions of each offer.

It’s important to do your homework when considering a balance transfer offer. After adding up the total amount of debt you’re carrying, calculate how much you can pay toward the total debt during the promotional period, and then how much you'll pay in interest after the rate reverts back to the standard APR. Compare what you would pay at your current APR to the balance transfer opportunity. Don’t forget to add in any fees associated with the balance transfer before making your decision.

If you do decide to move ahead with a balance transfer, remember that the low promotional APR only applies to the transferred debt. In many cases, if you make new purchases, say on the credit card you made the transfer to, you’ll be charged the standard APR for those purchases, which may likely be higher.

Did you know?

In addition to a 0% balance transfer introductory rate, Discover offers balance transfer credit cards that come with no annual fee , just like all other Discover cards. Compare cards like the Discover it® Cash Back Credit Card and the Discover it® Chrome Gas & Restaurant Credit Card to see how you can transfer your balance and earn rewards without paying an annual fee.

What is debt consolidation?

Debt consolidation loans move high-interest debts (including credit card balances) into a single, often lower-interest, payment.  Consolidation may be a way to simplify or lower your payments each billing period. However, it’s important to remember that this doesn't erase your debt.  

There are two main types of debt consolidation loan programs: secured and unsecured. A secured loan has an asset backing it, such as a home, vehicle, or even a retirement fund. An unsecured loan is not tied to collateral, and since it’s more of a risk to the lender, it typically has a higher interest rate than a secured loan. There may be an exception if the borrower has a very high credit score.

A common type of secured debt consolidation is a home equity loan. If there's a significant difference between your current home value and the mortgage balance, you may be able to borrow against that equity to receive a lower rate than with an unsecured loan.

It can be crucial to research every debt consolidation lender you consider using, as fraud is a possible risk. A reputable organization will send you everything you need to know about their services without you having to provide any detailed financial information. They’ll also be licensed to offer services in your state with accredited and certified counselors. Research credit counseling agencies with your state attorney general and local consumer protection agency before signing on the dotted line.

Which is better for my credit score: balance transfer or debt consolidation?

One option isn’t inherently better than the other for your credit score; it all depends on your own credit history. For example, you should take into consideration your revolving credit utilization ratio, which is your total revolving debt compared to your total revolving credit limits. Your credit utilization ratio is an important component of the amounts owed category that makes up about 30% of a FICO® Credit Score.1 Adding another line of credit with a high limit may reduce your overall ratio. With a lower interest rate, you can pay more toward the principal every month. This can lower your debt in the long term.

One thing to watch out for with balance transfers is unintentionally increasing your credit utilization ratio by canceling cards once the debt is transferred. For example, if the limit on the new balance transfer credit card you open is $10,000 and you cancel your old credit card after transferring $9,500 worth of debt, your credit utilization rate will jump to 95%. This can have a negative impact on your credit score. It may be advantageous to keep those old cards open, even if they’re not being used often, given that length of credit history typically contributes to about 15% of your FICO® Credit Score.

Balance transfers and debt consolidation loans can both be effective approaches if used responsibly. Whatever you decide, it’s important to review your options and choose what works best for your situation.

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  1. FICO® Credit Score Terms: Your FICO® Credit Score, key factors and other credit information are based on data from TransUnion® and may be different from other credit scores and other credit information provided by different bureaus. This information is intended for and only provided to Primary account holders who have an available score. See Discover.com/FICO about the availability of your score. Your score, key factors and other credit information are available on Discover.com and cardmembers are also provided a score on statements. Customers will see up to a year of recent scores online. Discover and other lenders may use different inputs, such as FICO® Credit Scores, other credit scores and more information in credit decisions. This benefit may change or end in the future. FICO is a registered trademark of Fair Isaac Corporation in the United States and other countries. Discover Financial Services and Fair Isaac are not credit repair organizations as defined under federal law or state law, including the Credit Repair Organizations Act. Discover Financial Services and Fair Isaac do not provide “credit repair” services or assistance regarding “rebuilding” or “improving” your credit record, credit history or credit rating.
  • Legal Disclaimer: This site is for educational purposes and is not a substitute for professional advice. The material on this site is not intended to provide legal, investment, or financial advice and does not indicate the availability of any Discover product or service. It does not guarantee that Discover offers or endorses a product or service. For specific advice about your unique circumstances, you may wish to consult a qualified professional.