Debt consolidation can be a great way to streamline your finances. It’s all about taking multiple debts and putting them in one place where you can make regular payments.
Balance transfer credit cards and personal loans are two ways to accomplish this goal. Whether you choose to consolidate with a credit card or loan depends on your budget and your financial goals.
Also read: A Beginner’s Guide to Capital One Balance Transfers
Interest rates
A balance transfer can save you a significant amount of money on interest charges by rolling over your existing high-interest credit card debt to a new, lower-rate card. However, these offers come with a cost: most cards charge a one-time fee to transfer your balance from your old card, and some even add on an annual fee that can eat up a large percentage of your transfer.
A personal loan, on the other hand, can help you consolidate multiple types of debt into one low-interest loan that you pay back over time. These loans can be a good choice if you have several small debts or a hefty bill to pay and want a more stable payment plan than a credit card.
Getting the best rate for your debt consolidation loan is largely determined by your credit score and the type of debt you’re trying to consolidate. You’ll also have to decide whether or not you want the convenience of a fixed monthly payment or the flexibility of a variable loan with flexible repayment terms.
You should also consider the length of the introductory period and any additional fees associated with the offer. Typically, the longest introductory period for a personal loan is around seven years, but that may vary depending on your lender.
Repayment terms
When it comes to debt repayment, the terms associated with a balance transfer or personal loan can make a difference. While both options can help you consolidate and pay down debt, deciding which one is best for your situation requires a careful analysis of your credit history, debts and current budget.
A balance transfer works by rolling over your existing, high-interest credit card debt onto a new card with a low or 0% interest rate for an introductory period, usually 12 to 18 months. If you don’t make payments during this time, your interest rate will return to the original credit card rate and your total debt could increase.
However, if you’re diligent about paying off the transferred balance during the introductory period and don’t use it for additional purchases, you can save a lot of money on interest charges over the long term. If you’re concerned that a balance transfer might lead you to rack up more debt than you can handle, you can also try paying down your transferred debt in chunks instead of all at once.
If you’re looking to get out of debt faster, a personal loan may be a better choice than a balance transfer. It offers a fixed interest rate and set payment schedule that can help you get out of debt much faster.
Personal loans don’t come with a promotional introductory APR like a balance transfer credit card does, but they do offer a longer repayment period. They don’t usually have an annual fee, and many come with perks such as rewards or discounts on everyday expenses.
Flexibility
If you’re battling debt that isn’t going away, one of the most helpful financial tools you can use is a balance transfer or personal loan. These types of loans allow you to consolidate your outstanding debt into a single loan and pay it off over time, so you’ll have less money to worry about each month.
However, deciding which type of debt consolidation to use isn’t always simple. You’ll need to look at your credit mix, the amount of debt you owe, and how much of a monthly payment you can afford. In addition, you should consider how a new loan could impact your credit score in the short term.
In general, balance transfer credit cards are better options for paying off small amounts of high-interest credit card debt because they offer a low introductory balance transfer APR for a limited period of time. A personal loan, on the other hand, can be more appropriate for larger amounts of debt or those that you know you need to repay over a longer period of time.
The most common reason people choose to use a balance transfer is because it offers a lower interest rate than the average credit card, lowering your overall monthly payments. Some cards even have a 0% introductory APR for a specific time frame (usually three to six months), which can be a huge help when trying to pay off debt quickly and at low costs.
Credit score
A credit score is a three-digit number that lenders use to determine how likely you are to repay borrowed money and pay your bills on time. It is a crucial piece of information because it can unlock lower interest rates, new credit card options, available lines of credit and more.
Credit scores are based on information in your credit reports from the three major credit bureaus: Equifax, Experian and TransUnion. They are used by banks, lenders and other creditors to assess your creditworthiness, determine the interest rate on your loan or credit card and make decisions about insurance and tenant screening.
Your credit score is typically calculated using a mathematical formula, known as a scoring model, that looks at the information in your credit report. It includes several data points, including your payment history, amounts owed, length of credit history and new credit.
The most important factor is your payment history. Late payments, bankruptcies and foreclosures will all hurt your score.
Keeping your balances low will also help. You should aim to have a 30% or less credit utilization on your revolving accounts (such as your credit cards), which means that you use only about 30 percent of the credit limit for purchases.