Mounting credit card debt can sometimes feel impossible to get out from under. Emergencies come up, things happen, and sometimes it’s easiest to reach for a credit card to cover unexpected expenses. Yet when you carry debt on your credit card, even if you make the minimum payments each month, interest still accrues and adds to what you owe.
If you’re struggling to pay off credit card debt, you’re far from alone. Revolving consumer credit rose to over $1 trillion in January, according to the Federal Reserve , and credit card debt has become the form of debt most widely held by families in the U.S . Fortunately, there are a few good solutions to getting rid of your credit card debt for good.
When faced with high-interest credit card debt, it can make sense to pay it off with either a balance transfer credit card or a personal loan. Both can consolidate all your credit card debt into one place at a lower interest rate, which can save you money and helps you deplete your balance without racking up high-interest charges.
But which of those two options makes sense for you? To answer that, you need to know what a balance transfer credit card is and how a balance transfer works. And you need to know the ins and outs of personal loans. Let’s get into it.
What is a Balance Transfer Credit Card?
A balance transfer credit card is when you transfer all your existing high-interest credit card debt to a new credit card. Generally, when selecting to do a balance transfer to a new credit card consumers will a apply for a new card with a lower interest rate than they currently or a card with an introductory 0% APR.
This introductory period can last anywhere from six to 21 months, and varies by lender. By opening a new card that temporarily charges no interest, and then transferring your high interest debt onto that card, you can save money because your balance will no longer accrue interest charges as you pay it off.
You can transfer debt from one credit card or multiple credit cards onto your new interest-free card. Paying off your credit card debt can be easier without the compounding interest, because you can pay off your balance without it growing every month during the introductory-rate period.
But you need to hear one crucial warning: After the introductory interest-free or low-APR period ends, the interest rate generally jumps up. That means if you don’t pay your debt off during the introductory period, it will start to accrue interest charges again, and your balance will grow.
How do Balance Transfers Work?
It’s easy to understand, in theory, what a balance transfer credit card does, but how do balance transfers actually work? The logistics can be a little more complicated.
There are a number of types of balance transfer credit cards out there, varying in their interest-free introductory periods, credit limits, rewards, transfer fees, and interest rates after the introductory period. You’ll want to compare the fees and credit limits, to figure out which balance transfer card works best for you.
Related: Personal Loan vs. Credit Card
Once you apply and are approved, then you can transfer your existing credit card debt onto your new card. You can only transfer as much debt as is covered by your credit limit onto the new balance transfer card.
It typically takes one to two weeks for your new credit card company to contact your existing cards and transfer the balances. Until the transfer is complete, you’ll need to make any payments you have due, so you don’t incur missed payment penalties. You’ll also still need to close out your old credit cards once the debt is transferred and they have a zero balance.
What’s the Difference Between a Balance Transfer Card and a Personal Loan?
Another option to pay off high-interest credit card debt is to use a personal loan. A balance transfer card transfers credit card debt onto a new credit card at a low or nonexistent interest rate—but the interest rate rises at the end of the introductory period.
A personal loan, however, can be used to pay off a wider range of existing personal debt, credit card or otherwise. And when you can choose a fixed interest rate, which means the interest rate you sign on for is the one you’ll have for the duration of the loan—it won’t go up.
You can usually take out a personal loan for a wide range of amounts (SoFi offers personal loans from $5,000 to $100,000). Depending on your credit, financial situation, and the state you live in, interest rates, terms, and the amount you can borrow may vary.
The application process typically requires a credit check and a look at your financial history and current employment. Once you’re approved, you can use your personal loan to pay off your high-interest credit card debt.
Basically, you use the personal loan to pay off your credit cards, and then you just have to pay back your personal loan in manageable monthly installments. A personal loan can allow you to pay much less interest on your debt; Credit cards charge an average of 16% interest, whereas
Choosing Between a Balance Transfer and Personal Loan
Both a personal loan and a balance transfer essentially help you pay off existing debt by consolidating what you owe into one place. The difference comes in how each works and how much you’ll ultimately end up paying (and saving).
Balance transfer credit cards can require a high credit score to qualify, which can be a challenge if your current credit card debt is affecting your credit score. Most balance transfer credit cards also charge a balance transfer fee, typically 3% to 5% of the balance you’re transferring, which adds up if you’re transferring a large amount of debt. Some balance transfer credit cards will offer an introductory period without transfer fees and with 0% APR, but you’ll want to do the math on how much you’ll save in interest versus how much you’ll pay in transfer fees.
For many people, a balance transfer credit card also comes with the additional concern of starting a new cycle of credit card debt. If you don’t pay off the debt on the new card, then it could hurt your credit score.
Additionally, if you fail to pay off the debt during the no-interest period, you could be back where you started; your balance will start to accrue compound interest based on the new card’s APR.
With personal loans, however, you can choose to have a fixed interest rate that doesn’t balloon. You will agree to a repayment term with your lender, which could be up to a few years. All you have to do with a personal loan is make the monthly payments.
Additionally, while personal loans can come with origination fees, and other fees some personal loans don’t have origination fees or prepayment penalties. And you won’t have to worry about transfer fees at all with a personal loan. Personal loans can also be used for personal expenses, which means you can pay off other higher-interest debt (like a car loan) by bundling it into the personal loan amount you request.
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