If you’re looking for the cheapest way to pay down your high-interest credit card debt, we can help. When you have a good credit score, you have options, including a balance transfer credit card and an unsecured personal loan. Either one will help you consolidate your credit card debt and eventually become debt-free, but there are several factors you should consider while weighing a balance transfer vs. a personal loan.
Here are the top five things you should look at before deciding which type of financing to pursue.
1. Interest rates
This is the first, and probably most important, thing to look at when comparing credit cards and personal loans. With a 0% card offer, there’s an interest-free period up front, but generally rates after the introductory offer are higher than an interest rate on a personal loan, especially if you have good credit, says credit expert John Ulzheimer.
However, there’s virtually no such thing as an interest-free personal loan. With good credit, you can find a personal loan with an interest rate in the single digits, though you’ll be pressed to find close to a 0% APR loan. The average interest rate for a personal loan ranges from 4.99% to 35.99%. The average credit card rate (after the 0% intro period is over) is a variable 17.45%.
How long the 0% interest period lasts is also a key consideration. Ask yourself what your total amount of debt is and what payment you’d have to make to pay it all off before your 0% interest period ends. Do the math. If you can afford the monthly payments to pay off your debt before interest kicks in, then a balance transfer card could be right for you. If it’s not, you may want to consider a personal loan.
2. Balance transfer fee
Many balance transfer offers include a one-time fee, which can add up to about 3% to 5% of the total debt transfer, says Thomas Nitzsche, a communications lead at Money Management International.
For example, if you want to transfer $5,000 to a new card that charges 0% interest for 12 months, you might be hit with a fee of $150 to $250. That’s still cheaper than a 12-month personal loan with an 11% interest rate, which would lead you to pay $303 in interest.
At the end of the day, you want to find the loan transfer option that lets you pay the least amount of interest possible.
Use a debt consolidation calculator to see which option is cheaper for you.
3. Origination fee
If you look to an online lender for a personal loan, know that many of them a charge loan origination fee, a one-time charge that is taken out of the total amount you receive. Banks and credit unions typically do not charge an origination fee on personal loans.
These fees can be as high as 6% of the loan. In other words, if you asked for a $5,000 loan to consolidate credit card debt, you might receive $4,700, with a $300 origination fee deducted from your balance. Origination fees are typically included in the loan’s annual percentage rate.
4. Fixed rates, payment schedule
Ulzheimer says he favors personal loans in this situation because the interest rate never changes and the loan has a fixed payoff date. With predictable payments, a personal loan can help with budgeting. If you’re not managing a credit card absolutely perfectly, then you may end up paying more for a longer time than you would have with a personal loan.
Steve Repak, a North Carolina-based CFP professional and author of “6 Week Money Challenge” says he favors a balance transfer because it’s more flexible than a personal loan.
“What if you lose your job or what if something comes up, some type of financial emergency where you can’t make that $500 payment?” Repak says. “A 0% transfer might give you some flexibility even though it might cost you more. With a fixed payment, you’re kind of stuck with that.”
As you’re deciding how to consolidate debt, look at your situation to see which makes sense for you. If you need help with budgeting and want fixed payments, a personal loan is a good option. If you’d prefer flexibility, a balance transfer credit card may be right for you.
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5. Credit score
Opening up a new card and transferring all your credit card balances to it might push the utilization ratio on that card close to 100%, which could hurt your credit score. Credit scoring models also place a negative emphasis on revolving debt, so if you keep transferring the debt from one card to another, your score could go down even more.
On the other hand, taking out a personal loan to consolidate debt could lower your utilization rate to 0%. That could help your score. Though you aren’t really getting out of debt, just converting it, the credit scoring models don’t see it that way, so your credit score could rise.
Still have questions about consolidating your debt with a balance transfer card?
Browse Bankrate’s complete balance transfer catalog for everything you need to know before applying for one of the year’s top balance transfer offers.