Credit card balance transfers and consolidation loans are two of the most common methods of using debt to ease debt. Yes, you read that correctly, you will take on debt to help you manage the debt you already have with either of these solutions.

While this might sound counterproductive, it works — when done right. This is why it’s important to understand the pros and cons of each solution to determine which would work best for you. To that end, let’s take a look at the ramifications of balance transfers vs. credit card consolidation loans.

What is a Balance Transfer?

Credit card balance transfers — as the term implies — entail the shifting of the outstanding obligation on one or more credit cards to a different one with either a lower interest rate or better terms. Either way, the idea is to pay less in total to clear up those debts.

What is a Consolidation Loan?

The process is similar to that of a credit card balance transfer. In fact this could actually be considered another type of balance transfer as you’re taking out a loan, the proceeds of which you’ll use to pay off a number of unresolved amounts. Essentially, you’re transferring those balances to the new loan.

The Pros of a Balance Transfer

Most balance transfer cards come with a zero percent APR limited time offer of between 12 and 18 months. This gives you an opportunity to pay off your credit card debts with no added interest. In turn, you’ll garner significant savings — when you’re in a position to pay the amount transferred in full before the introductory period ends.

Moreover, once the debt is paid off, you have an additional line of credit open, which can help boost your credit score — when properly used. A lot of balance transfer cards also offer travel and shopping rewards, which can be of benefit when carefully applied too.

The Pros of a Consolidation Loan

A lot more flexible, you’re not limited to using them just for unsecured credit card debt consolidation the way you are with a balance transfer card offer.


The annual percentage rate on these types of loans are lower than those applied to credit cards too. This can result in significant savings, as you’ll swap multiple high interest debts for a single one at a lower interest rate.

Moreover, the rate can be fixed, so you’ll have a defined payoff date, which makes budgeting around it easier to do.

The Cons of a Balance Transfer

The zero interest rate is temporary. It’s probably a great deal if the amount you need to transfer can be paid in full during that period. However, you’ll be looking at interest rates in the 25 percent range in most cases if you cannot.

Further, that rate will often be applied to the entire transferred amount, going all the way back to when you executed the transfer — regardless of the total you have left over when the promotion expires. This can saddle you with even more debt than you had in the first place.

You’ll also encounter transfer fees of a percentage of the balance you move to the new card. This amount will be folded into what you already owe and yes, interest will accrue upon it as well.

The Cons of a Consolidation Loan

You must be careful to choose between an unsecured personal loan and a secured one such as a home equity loan or a line of credit.  You could lose your home with either of the latter if you can’t repay the loan.

You should also avoid creating new debt. Consolidation deals, with their lower monthly payments can give the illusion of having less debt, when the reality is you still have the same amount. You’re simply paying less to service it each month. If you allow yourself to fall into this trap you could wind up with even more debt.

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