Debt consolidation loan vs. balance transfer credit card: Which is better?

If you're struggling with credit card debt, taking out a debt consolidation loan can simplify payments and lower your interest rate.

Another way to tackle the problem is a 0% APR balance transfer credit card, which can give you up to 21 months without interest to pay off the balance.

Both options have benefits and drawbacks, however. Here's how to figure out which one is right for your situation.

A balance transfer credit card lets you move debt from one credit card to another, usually with a low or 0% promotional interest rate for a set number of months. If you can pay down that balance during the intro period, you'll save money on interest.

Here's how it works:

1. Apply for a balance transfer card. Depending on the card you choose and your creditworthiness, you could be approved for a 0% intro APR for anywhere from 12 to 21 months.
   
2. Transfer your existing balance. The new card issuer pays off your old card and the debt is now owed to the new card. However, if your outstanding balance is more than your new credit limit, you won't be able to transfer the entire balance.
   
   Balance transfers usually come with a transfer fee, typically 3% to 5% of the total transferred. Some cards require you to make any transfers within the first 30–60 days of account opening to qualify for the intro rate.
   
3. Pay down the balance. Imagine you transfer a $5,000 credit card balance onto a card offering 0% APR for 18 months. Instead of paying interest during those 18 months, every payment goes toward the principal. Any balance remaining after the intro period will begin accruing interest at the new card's standard APR, which could be as high as, or even higher than, your original APR.
   
4. Avoid making more purchases. If you transfer $5,000 to a 0% APR card but keep spending on either card, you could wind up adding to the debt faster than you're paying it down. In addition, new purchases may not receive the same 0% rate unless the card also offers an introductory purchase APR.

The Citi Simplicity® Card and the Wells Fargo Reflect® Card are two of our top picks for intro APR credit cards that offer balance transfers.

Balance transfer credit cards can be an excellent tool for paying off debt, but they're not without drawbacks.

Pros

• Intro APR cards can allow you to pay no interest on existing debt for up to 21 months.
• Without interest accumulating, you can pay off debt faster with consistent payments.
• You may also be able to transfer more than one card balance.
• Consolidating multiple card balances means just one payment and one due date.
• Paying down revolving debt can lower your credit utilization ratio, which helps your credit score over time.
• The new card may come with a welcome bonus, cash back, statement credits or other perks.

Cons

• Typically requires good to excellent credit.
• The balance transfer fee can be up to 5% of the amount transferred.
• New purchases may not receive the same 0% rate.
• Missing a payment can end the promotional rate.
• Any balance after the promo period will be charged your new standard APR, which can be 20% or higher.
• If you miss payments, you could be assessed a penalty APR.
• Temptation to start charging more on your old card once the balance is transferred.

A debt consolidation loan is used to pay off multiple existing debts, like credit cards. Typically, the APR on the new loan is lower than on your existing bills — and the fact that it's fixed will help keep you from slipping into a debt spiral.

Here's how it works:

1. Apply for the loan. The loan application process is more complex than a credit card and will likely require more documents. Approval and funding can take as little as 24 hours or as long as a week, depending on your application and lender. There may be an origination fee, which can be 1% to 10% of your loan total.
   
2. Receive funding. Many top lenders will use the money to pay your creditors directly, saving you the trouble of divvying up payments. SoFi and Upgrade both offer deductions if you allow them to make direct payments for you.
   
3. Begin making loan payments. Your lender will let you know your monthly payment amount, the date of your first payment and your loan total. Many lenders offer a rate discount if you set up autopay. If you fall behind, you may have to pay a late fee, which can be a flat amount (often $25 to $40) or a percentage of the overdue payment. Not all lenders charge late fees, however.

Debt consolidation loans can help consumers with weaker credit, but they come with more upfront costs.

Pros

• Lower fixed-rate APR and predictable monthly payments.
• Can be approved for a larger amount.
• Easier to get approved for.
• Applicants can improve approval odds and rate with a co-signer or collateral.
• Late fees apply, but there's no penalty APR for missing payments.

Cons

• May have to pay origination or application fees.
• A lower monthly payment may cost more with a long repayment term.
• Using collateral risks your home or other assets.

Which debt relief strategy is better depends on your credit profile, the amount of debt you're carrying and how quickly you think you can pay it off.

Neither debt consolidation nor a balance transfer will make debt disappear or address underlying overspending habits. They only change the structure of your debt.

When a balance transfer card makes sense

• You have good-to-excellent credit. 
• The interest you'll save is greater than the transfer fee.
• You can make more than the minimum payment each month.
• You can pay off the balance before the promotional period expires.
• You're able to avoid new credit card debt during repayment.

When a debt consolidation loan may be better

• Your credit isn't strong enough for a 0% APR card.
• You don't think you could pay off the bill before the end of a balance transfer card's intro period.
• You want a fixed rate, predictable payments and a definite payoff date
• You have a large balance that will exceed your card's credit limit.

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