What is a balance transfer credit card?
A balance transfer credit card allows you to transfer existing debt to a new card. For example, you may transfer multiple balances as long as you don’t exceed your balance transfer limit.
Balance transfer credit cards often come with a low introductory APR on balance transfers which last for a limited time. This can be an effective way to manage debt if you can pay off what you owe before the introductory APR expires. After the offer period ends, you’ll start being charged the regular APR for balance transfers on whatever balance is left.
Balance transfer credit card pros and cons
Understanding the benefits and drawbacks of balance transfer credit cards can help you decide if they make sense for your financial situation.
Pros of balance transfer credit cards
- Save on interest: Balance transfer credit cards may offer a low introductory APR. You can avoid higher interest charges if you pay off your balance transfer during this offer period.
- Fewer monthly payments: Instead of managing multiple balances from different lenders, you can consolidate some or all of your debt onto one balance transfer credit card. This can help to simplify your finances and make it easier to keep track of payments.
- Flexible repayment: As long as you make the minimum payments by the due date each month, you’ll avoid higher interest charges on balance transfers during the low introductory APR period. This can help to give you flexibility to pay more in some months and less in others during the intro period.
Cons of balance transfer credit cards
- Balance transfer fees: Most balance transfers aren’t free. For each balance transfer, credit card issuers may charge either a flat fee or a percentage of the balance (usually whichever is higher).
- Creditworthiness requirements: Credit cards with low introductory APR offers typically require good to excellent credit scores. If you have a lot of revolving debt, you may have a high credit utilization ratio, which can lower your credit score. In that case, you may have a harder time getting approved.
- Introductory APRs are temporary: Depending on the credit card, your promotional period may last anywhere from 12 to 21 months. If that’s not long enough to pay off your debt, the leftover balance will be subject to the credit card’s regular, higher APR.
When does a balance transfer credit card make sense?
Balance transfer credit cards may make sense when:
- You can repay the balance within the low introductory APR period: Repaying your balance within the introductory period can mean significant interest savings. If you’re confident you can repay the balance before the intro APR period ends, a balance transfer credit card could be the right move.
- You expect to save money: There may be times when a balance transfer credit card still makes sense, even if you can’t pay off the balance before the intro APR period ends — for instance, if the credit card’s regular APR is lower than the APRs on your existing debt. You’ll need to run the numbers to see if you can still save, factoring in the balance transfer fee as well as interest charges.
What is a personal loan for debt consolidation?
A personal loan is usually an unsecured installment loan with a fixed interest rate. Your creditworthiness, income and other factors, such as your loan amount, determine your interest rate.
You can use a personal loan for almost anything, including debt consolidation. For instance, you can use funds to repay existing credit card balances and loans. Keep in mind that lenders may place restrictions on using the personal loan proceeds for certain expenses, such as post-secondary education or business-related costs.
Typically, personal loan funds are deposited directly into your bank account. However, some lenders may give you the option of paying your creditors for you. This is common among personal loans that are labeled as “debt consolidation loans.”
Personal loan pros and cons
Like balance transfer cards, personal loans for debt consolidation come with their own pros and cons.
Pros of personal loans
- One monthly payment: Consolidating debt with a personal loan can mean rolling multiple debts into one fixed monthly payment, helping to simplify your finances and make it easier to track what you owe.
- You may be able to save on interest: Depending on the loan term and interest rate you qualify for, you may save money on interest and even pay your debt off sooner (particularly if there’s no prepayment penalty).
- Fixed interest and monthly payments: Your interest rate typically remains the same for the life of the loan, and you’ll know the date you’ll be scheduled to pay it off. That means you’ll know exactly what your monthly payment will be, which helps to make it easier to plan and budget around.
- Flexible loan terms: Personal loans may come with a wide range of loan terms to choose from. A longer term can allow for a lower monthly payment but may mean paying more in interest over time. Meanwhile, a shorter term may result in a higher monthly payment but can mean you pay less interest overall.
Cons of personal loans
- Credit score requirements: Personal loans typically require higher credit scores if you want to access the lowest APRs and save the most money. Keep in mind that lenders may also consider factors such as your debt-to-income ratio (the percentage of your gross income that goes toward debt payments), income and your credit history.
- Potential fees: Some lenders may charge additional fees, like an origination fee for processing your application and disbursing the funds, and a prepayment penalty for paying off the loan early. Origination fees are typically deducted from your loan disbursement.
- You could pay more over time: If you opt for a longer loan term, you may end up paying more even if the interest rate is lower than what you’re currently paying. Personal loan APRs can also range widely, with some that are comparable to credit cards.
When does a personal loan make sense?
Here are some situations when a personal loan can make the most sense:
- You’ll save money: If you qualify for an interest rate that’s lower than what you’re paying on your current debts, consolidating debt with a personal loan may make sense. When doing the math, consider the interest rate, loan term and any fees to figure out whether you’ll be saving money over the life of the loan.
- You can keep up with the payments: If the monthly payments are comfortably within your budget, a personal loan may be the right move. You shouldn’t take out a loan if you think you’ll have trouble making the payments.
- You need a longer repayment term: Many lenders let you choose a loan term, which can span multiple years. For example, Citi® Personal Loan terms can range up to 60 months. A longer term can lower your monthly payment and give you more time to pay off debt than a balance transfer card.
- You prefer the predictability of fixed monthly payments: With fixed interest and a fixed term, your personal loan payments will be the same every month. You may also be able to automate your payments to help ensure you never miss a due date.
Balance transfer credit card or personal loan: which is right for you?
Your financial situation and goals will be the key deciding factors when considering a balance transfer credit card or personal loan.
For example, if you need flexible payment options and can pay off your balance relatively quickly, a balance transfer credit card may be better option. Conversely, if you prefer the stability of fixed monthly payments and need a longer repayment term to help control your monthly costs, a personal loan might be the way to go. In that case, Citi offers flexible, fee-free personal loans to qualified applicants. If you think you could benefit from a Citi Personal Loan, apply online today.
No matter which option you choose, it’s important to have a solid plan to pay off your debt and manage your finances going forward. That way, you’ll be able to start tackling your other financial goals more effectively.
This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.
