Should I use credit cards or a personal loan to consolidate debt?

Personal loans and balance transfer credit cards are two of the most popular ways people consolidate debt. Deciding which one will help you reach your goals faster can be hard to figure out at first. Below are some of the key differences of using a personal loan versus a credit card to consolidate debt, to help you make the best decision.

Why use a credit card for debt consolidation?

Take advantage of low balance transfer APRs: Many credit card companies offer introductory balance transfer APRs at low rates, sometimes at 0%. This means that you may be able to pay that debt off without accruing a lot in interest, as compared to higher-rate credit cards.

Pay off short-term expenses: Credit cards are great for expenses that you know you’re going to pay off quickly. If you are looking to consolidate a small amount of debt in a short period of time, credit cards can allow you that flexibility.

Drawbacks of using a credit card to consolidate debt

  • Making the minimum: Paying the minimum on your credit card bill is a no brainer—it’s one of the best ways to maintain your credit. But, if you’re just making the minimum payment on a large debt, it may take a long time to pay off. This is because most minimum payments set on credit cards are a flat amount or small percentage of the overall balance. While you should definitely pay your minimum, it can be hard to make a dent on a large balance—especially if that balance is accruing interest.
  • The uncertainty of a variable APR: If you’re hoping to have a set plan in place to pay off debt, a variable APR may throw a curveball in the future. Most credit cards come with variable APRs, which means that while you may be offered an attractive interest rate, it may change over time. If your debt payoff plan doesn’t have wiggle room, using a balance transfer card to consolidate debt might not fit.
  • The psychology of a credit card: Studies show that people spend more using credit cards than paying in cash. If you’re someone who prefers to have spending guardrails in place, having another credit card might be a temptation you don’t want around.

Why use a personal loan for debt consolidation?

Using a personal loan to consolidate debt can come with a few advantages:

Make budgeting easier: Most personal loans are fixed installment loans, which means that you pay it back with fixed payments over a set period of time. You’ll likely know the total cost of borrowing the money when you accept the loan, as compared to a credit card, which has variable rates. Fixed payments make it easy to plan into the future and know exactly how to budget each month.

Your planned payoff date: Unlike credit cards, which are meant to stay open and revolve, personal loans have a set term length. This allows you to stay focused on the future date when you’ll have the debt fully paid off. Many people use a payoff date as a way to celebrate. It’s a day to recognize the hard work it takes to pay off debt. You might not be able to have that same gratification if you consolidate debt with a credit card.

Potentially access more money: With a personal loan, you may be able to access more money than with a credit card. If you need to consolidate a large sum of debt, you may have better luck consolidating all of it with a single personal loan than trying to refinance with a credit card. Personal loans often range from a few thousand dollars up to $50,000.

Set it and forget it: Personal loans don’t come with the spending temptation of credit cards. If you are someone who has debt because of overspending on credit cards, using a personal loan could be the better solution. With a personal loan, you don’t have the option to overspend—so you can focus on your debt payoff progress.

Drawbacks of using a personal loan to consolidate debt

  • When you take out a personal loan, you’ll receive a one-time lump sum. If you realize after the fact that you need more money than you’ve been funded, you’ll have to find another way to get the extra money. Versus a credit card, where you can access as much money as permitted on your credit line.

 

Which should you choose for debt consolidation? Personal loans versus credit cards

Choosing between a credit card and a personal loan for debt consolidation is a hard decision. There is no one right choice for everyone. Comparing the two options is ultimately going to come down to you and your financial goals.

We suggest that you take the time to calculate how paying off with different options would help you reduce that debt as quickly as possible and at the lowest price.

For example: While the short-term appeal of a low credit card APR might be attractive, do the math for how you’re realistically going to pay that debt off. If you don’t think you’re going to pay it in the 12 or 18 months with an introductory APR, having a fixed personal loan could be the economical option.

If you decide to consolidate debt using a balance transfer credit card:

  • Consider selecting an offer that provides an introductory balance transfer APR
  • Try to pay more than your minimum each month
  • Set clear rules for how you’re going to use it so there’s no chance of overspending

If you decide to consolidate debt using a personal loan:

  • Consider selecting an offer at a rate lower than your current APRs
  • Make sure to request the right amount for all of the debt you’re hoping to consolidate
  • Plan in advance for the day when you’re going to have that debt paid off. You’ve earned the right to celebrate!

Still not sure which is right for you? Learn more about debt consolidation: