Balance Transfer vs. Debt Consolidation

A balance transfer is when you move the balance from one credit card to another. You can also transfer multiple balances, but only if they don’t exceed the new card’s credit limit. Usually, you’ll want to do this when you’re eligible for a lower annual percentage rate (APR). That way, you can save money on interest.

Debt consolidation, meanwhile, lets you combine multiple debts into a personal loan. Normally, only unsecured debts (like credit cards or other personal loans are eligible. This can be a good option if the new loan comes with an overall lower interest rate and you want to simplify your monthly payments.

MoneyLion offers a service to help you find personal loan offers. Based on the information you provide, you can get matched with offers for up to $100,000 from our top providers. You can compare rates, terms, and fees from different lenders and choose the best offer for you.

Key Takeaways

• Longer terms can cost more. Consolidation terms can run 1 to 7 years — lower payments, but potentially more total interest over the life of the loan.

• Both can briefly ding your credit. New credit is about 10% of your FICO score, so expect a small, temporary dip that on-time payments help reverse.

• Match the tool to your debt. Choose a balance transfer for card-only debt you can pay off fast; choose consolidation to simplify mixed debts over a set term.

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Balance Transfers and Debt Consolidation: What’s the Difference?

Balance transfers and debt consolidation can both be effective methods for paying off debt. But the way they work is a little different.

A balance transfer involves taking out a new credit card and moving the outstanding balance from at least one other card onto it. You can transfer any balance up to the new card’s credit limit, but not beyond that.

Many balance transfer cards come with a low or 0% introductory APR, though you’ll generally need good credit to qualify. This introductory APR can last anywhere from six to 21 months. Once it ends, the interest rate (and your monthly payment) will likely increase. That’s why it’s best to try to pay off your balance during the intro period.

Most card issuers won’t let you do a balance transfer from one of their cards to another. This means you’ll need to apply for a credit card through a different company. For example, if you’re transferring the balance from a Citi card, you’ll need to find another card issuer (like Capital One or Discover) to complete the process.

Know that this option isn’t without risk. You may need to pay a balance transfer fee when moving the balance from one card to another. This is usually 3% to 5% of the transferred amount. Falling behind on payments by more than 60 days could also negate the promotional APR.

While balance transfers are mainly used for credit card debt, debt consolidation is for both credit cards and loans. When you consolidate debts, you’re essentially using a new loan to pay off some (or even all) of your existing balances. You’ll still need to repay what you owe, but you’ll have fewer monthly payments to deal with.

In addition to simplifying your monthly payments, debt consolidation will ideally lower your overall interest rate. This could also mean a smaller monthly payment than you were paying before. Be mindful of the new loan’s repayment term, though. A longer term could make paying off your debt take longer and mean more lifetime interest charges.

Pros and Cons of Balance Transfers 

Balance Transfer Pros:

• Reduces how much you’re paying in interest (possibly to 0% if you pay off the new balance within the introductory window)

• Can be used to consolidate multiple credit card balances (up to the new card’s credit limit)

• Streamlines monthly payments

Balance Transfer Cons:

• Comes with a balance transfer fee (usually 3% to 5% or a fixed amount)

• New purchases made on the balance transfer card are usually ineligible for the promo APR

• Late payments (60+ days) could end the low intro APR

• Interest rates rise after the introductory period ends

• Usually requires opening a new card with a different issuer for the balance transfer

Pros and Cons of Debt Consolidation 

Debt Consolidation Pros:

• Simplifies monthly repayment plan (one loan, one payment)

• Lower interest rate and smaller monthly payments

• Potentially long repayment terms (up to 7 years)

• Fixed repayment term

Debt Consolidation Cons:

• Longer repayment terms often mean higher overall interest charges and other fees

• Longer terms could make paying off your debt take longer

• May have a lower initial rate that increases over time

• Lenders may charge an origination fee

How To Make Your Decision 

Deciding between a balance transfer and debt consolidation doesn’t have to be hard. Here’s how to decide:

• Choose a balance transfer if you’re struggling to keep up with multiple credit card payments and qualify for a new credit card with 0% or low intro APR.

• Choose debt consolidation if you’re tired of juggling multiple unsecured debts (loans and credit cards) and want to combine them into one, low-interest loan with a simplified (potentially smaller) monthly payment.

In both cases, make sure you can keep up with the new loan (or credit card) payment. This gives you the best chance of paying back what you owe while keeping your credit in a good place.

FAQs 

Is it better to do a balance transfer or debt consolidation loan?

It’s really up to you and what you need. A balance transfer is primarily geared toward credit card debt, while debt consolidation loans can be used for both credit cards and loans. You’ll still need to repay what you owe, but the way you go about it depends on the method. If you qualify for a 0% intro balance transfer card and can pay off the entire balance during that introductory period, you could save thousands in interest. But if you need more time, the smaller (fixed) payments of debt consolidation could be better.

Do balance transfers affect your credit score?

Yes, but only temporarily. New credit makes up 10% of your FICO credit score, so when you apply for a new card or loan, you might see a slight drop. With consistent on-time payments, your score should bounce back after about a year.

What are other ways to pay off debt?

Debt consolidation and balance transfers aren’t your only debt repayment options. You could also do it yourself with the debt snowball method. This entails listing your debts from the smallest balance to the highest (regardless of interest). Prioritize paying off the smallest balance first while paying the minimums for all other debts. Once you’ve finished with one debt, move on to the next highest and so on. If you’re struggling to keep up, consider nonprofit credit counseling or a debt management plan instead.

How do I calculate the payment on a $50,000 debt consolidation loan?

Use an online debt consolidation calculator to figure out what your monthly payment would be on any loan. You’ll need to know the new loan’s interest rate and repayment term, as well as any other lender fees being tacked on. Take a $50,000 loan with a 10.99% APR and 5-year repayment plan. The rough monthly payment would be $1,087.

Can I do debt consolidation or a balance transfer with poor credit?

It’s possible, but you could end up with a higher interest rate, which could negate the benefits of both. Your balance transfer card might also have a lower credit limit than you need. The same goes for your debt consolidation loan, since lenders consider your credit score (and history) when determining how much to approve you for.

Photo Credit: elenaleonova / iStock.com

Key Terms

• Balance transfer: Moving a balance from one credit card to another, usually to capture a lower or 0% introductory APR.

• Debt consolidation: Combining multiple debts into a single loan, ideally at a lower overall interest rate, for one monthly payment.

• Introductory APR:

  A temporary promotional rate (often 0%) on a balance transfer card that lasts six to 21 months before reverting to the standard rate.

• Balance transfer fee A charge for moving a balance, typically 3% to 5% of the transferred amount.

• Annual percentage rate (APR): The yearly cost of borrowing, expressed as a percentage, used to compare cards and loans.

• Origination fee: A one-time lender fee for processing a loan, often deducted from or added to the loan amount.

• Unsecured debt: Debt not backed by collateral, such as credit cards and most personal loans — the type generally eligible for consolidation.

• Repayment term: The length of time you have to repay a loan; longer terms lower the monthly payment but can raise total interest.

Sources

• CFPB — What is the difference between a balance transfer and a cash advance? — how balance transfers and intro APRs work.

• CFPB — What do I need to know about consolidating my credit card debt? — debt consolidation basics and tradeoffs.

• FTC — How To Get Out of Debt — comparing payoff strategies and avoiding fees.

• myFICO — What's in my FICO Scores? — how new credit affects your score.

Summary generated by AI, verified by MoneyLion editors