If you’re looking to free yourself from higher-interest credit card debt at your own pace and within your own budget, you have lots of options to explore. Among the most popular you may have seen are balance transfers and personal loans.
There are many benefits to each, but they also differ significantly — we’ll walk you through what you need to know to make an informed decision.
What is a balance transfer?
Simply put, a balance transfer is when you move your credit card balance from a higher-interest card to one with a more advantageous interest rate. When you’re considering how to consolidate credit card debt, a primary route to take could be a balance transfer to a credit card with a 0% introductory APR.
If you can pay the new card off before the promotional interest rate expires, a balance transfer could be a great tool to get rid of your higher-interest debt. A good way to determine if a balance transfer works for you is to figure out how much you can afford to pay each month. Then divide your total debt by that monthly payment. This will give you the number of payments you will have to make to be free of that credit card debt. If you find you need to make 12 payments, for example, a balance transfer to a credit card with an introductory 0% APR for a year could be a great pathway to reduce debt.
Before you make your final decision, there are some things you should consider because they might drive up your overall costs and expenses. Some considerations with using a balance transfer include:
The introductory APR jump
Many credit card companies offer a 0% introductory interest rate on balance transfers that may last anywhere from 6-18 months. Check the fine print to see what the introductory APR is for balance transfers and how long it lasts. Make sure you look at what the standard rate will be after your introductory period expires. If you carry a large balance and can’t pay it off within the time allotted for your balance transfer, the rate hike may be challenging.
Balance transfer fees can range from 3% to 5%
These fees are added to your balance and can accumulate quickly. For example, if you have a credit card balance of $7,500, a 3% transfer fee would add $225 to your debt. Remember that you’ll have to pay a fee for each credit card balance you transfer.
Limits on Balance Transfers
Balance transfers can be a useful tool for debt consolidation, but there are limits to how much you can transfer. Some credit cards may have limits on the amount you can transfer or may not approve a high enough credit limit to cover your existing balance. If you have $20,000 in higher-interest debt, for example, a balance transfer may not be your best option because it could exceed the credit limit on your new card. For higher balances, a personal loan may be the better option.
What is a personal loan to pay off credit cards?
A personal loan is a type of installment loan that can give you the funds you need to pay off your higher-interest credit card. You’ll have to pay off the personal loan, of course. But now you’ll have a loan with a fixed APR and a set regular monthly payment over the life of the loan. Plus, you will know exactly how long it will take you to pay it off because you get to choose the term to ensure payments fit your budget.
For many, using a personal loan for debt consolidation is a great option. While credit card consolidation loans won’t offer a 0% introductory rate, you will have peace of mind knowing your monthly payments and interest rates will not fluctuate.
Personal loans may be a great option for credit card consolidation, but it is still important to research and compare lenders. As with balance transfers, however, there are some things you should consider when looking into a personal loan for debt consolidation:
Personal loan origination fees can range from 1% to 5%
Some lenders charge origination fees that can range from 1% to 5% of the total loan amount. Other lenders, like Discover Personal Loans, do not charge any origination fees, closing costs or prepayment penalties; it may be to your benefit to explore those lenders who don’t charge these kinds of fees.
Minimum loan amounts
Many lenders have requirements around minimum amounts for personal loans. With a Discover personal loan, you can request any loan amount from $2,500 to $35,000. If you are looking to consolidate less than $2,500 of debt, then a balance transfer may be more of an ideal solution for you.
Which is best for me, a balance transfer or a personal loan?
When you’re considering a balance transfer or personal loan, it’s smart to look at the benefits, costs and differences between them.
Typically, for lower debt balances that you can comfortably pay off in one to two years, a balance transfer may be your best solution. You could get the benefit of an introductory 0% APR where you could save on interest for a short term. However, for higher debt balances of $2,500 or more, a personal loan may be better. You will have a fixed APR and a set regular monthly payment over the life of the loan, and you can choose a term to ensure payments that fit your budget.
See the potential savings of consolidating higher interest debt with a loan from Discover.Debt Consolidation Calculator