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Consolidating Credit Card Debt: Balance Transfers vs. Personal Loans

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If you're ready to take control of your credit card debt, one thing is certain: you're not alone. A 2015 NerdWallet study reports that the average U.S. credit card debt totals $15,675, and that doesn't include other types of consumer debts such as auto loans. Add in mortgage payments and student loans – plus a cost of living that's outpacing income growth – and it's no wonder that the average American is looking for credit card debt relief.

Often, credit card debt is spread across several different cards, leading to multiple statements and payments. A credit card debt consolidation loan combines the balances owed into one larger loan. This can make repayment more convenient and efficient. Also, in some cases, the consolidation loan interest rate may be lower than the cards' interest rates. This sometimes results in savings that may help a responsible borrower pay back credit card debt faster. Personal loans and credit card balance transfers are two ways that consumers can consolidate credit card debt.

1. What is a personal loan?

Banks issue personal loans for many purposes – including paying off debts. Not all personal loans are the same, however. Many personal loans are unsecured. An unsecured loan is not supported by an asset such as a house or car. Instead, the lender considers the borrower's credit history and ability to repay the loan when evaluating the application. Credit cards are a common type of unsecured personal loan.

Secured personal loans, on the other hand, are based on the value of an asset, plus credit history and ability to repay. An asset used to secure a debt is called collateral. With a secured personal loan, if you don't abide by the loan agreement, you can lose your collateral. For example, if you used your car as collateral but don't pay the loan back as promised, your lender can take possession of your car.

For more tips on managing debt, read 5 Surprising Ways to Help Manage Credit Card Debt.

2. What's the difference between variable-rate and non-variable rate personal loan?

With a variable-rate loan, the interest rate is based upon an economic index such as the Prime Rate or the U. S. LIBOR Rate. Therefore, the interest rate can go up or down, resulting in payments that may change. The interest on a non-variable interest rate loan is not based upon an economic index. The interest rate may change, however, if the borrower makes late payments or defaults.

A borrower with a strong credit history and ability to repay – and valuable collateral – is more likely to earn the most favorable interest rate terms. Learn more about financial jargon by reading a Glossary of Financial Terms.

3. What are revolving lines of credit?

Revolving credit is a type of loan that you can access on demand, up to a limit predetermined by your lender or credit card issuer. A credit card is a common type of revolving credit. As long as you abide by the terms of the cardholder or loan agreement, you can continue to spend with your credit card, up to your approved credit limit.

If you carry a balance on your revolving credit account, then you may have the option to make a minimum payment, pay off the balance in full, or pay something in between. Your available credit is your credit limit minus your current balance and any pending charges. For example, if you have a $1,000 credit card limit but an $800 balance, you have $200 left to spend. But if you pay the $800 in full on or before your payment due date, you may be able to spend up to the full $1,000 credit card limit once again.

4. What is a credit card balance transfer?

A balance transfer is a way to transfer a balance from one credit card to another credit card. You may be able to transfer multiple credit card balances to one credit card, provided you don't exceed the available credit on the consolidating card. This may help make repayment more convenient. To learn more about balance transfers, read How to Know When a Balance Transfer Could Be a Smart Move.

Credit card issuers occasionally offer low, but temporary, balance transfer interest rates. Read the offer terms carefully before you agree or apply. Not all applicants will get approved for the same interest rates. Just like personal loan lenders, credit card issuers offer the most favorable balance transfer terms to the strongest applicants.

5. What are the similarities and differences between personal loans and balance transfers?

Personal loans and balance transfers offer ways to consolidate a wide variety of debts, making repayment more convenient and efficient. In both cases, a borrower with a strong application could potentially save money on interest charges. But although personal loans and balance transfers are somewhat similar, specific terms make personal loans and balance transfers quite different.

For example, a personal loan can be secured with an asset such as a house or a car, while a balance transfer is unsecured credit card debt. A personal loan also lasts for a fixed period of time, such as 3, 5, or 7 years. Once you repay a personal loan, the lender closes the account. On the other hand, a credit card balance transfer is revolving debt. Even after repaying the balance in full, the credit card account stays open.

What kind of terms you qualify for depend on whether or not you want a fixed or open-ended term, your creditworthiness, ability to repay, and whether or not you are willing to put up collateral. Before you apply for a personal loan or a balance transfer offer, research the details with the lender or credit card issuer. Origination fees, interest rates, and length of loan are some of the things you may want to consider when evaluating your options. By taking your personal circumstances and the specific terms of the loans you're considering into account, you'll be in a position to make a wise choice.

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