Being overloaded with debt can be stressful. If you’re not able to keep up with your monthly bills, your credit suffers, which could make it even more difficult to get a car or home loan later on.
According to the Federal Reserve, consumer revolving credit increased by 13.5% in November 2016 to a nationwide total of $992.4 billion. That debt is also getting more expensive. The Fed raised interest rates by 0.25% in December, with promises for additional rate hikes in 2017.
If you need cash to consolidate some of your debt, you probably have two choices: balance transfer credit cards or personal loans. Either option could save you interest payments on your debt, but there are factors that you should consider with each when you make your decision.
What are balance transfer credit cards?
A balance transfer credit card is a credit card that allows you to transfer the balance over from another card. These cards also have 0% introductory rates, which the card issuer gives as an incentive for you to sign up. The 0% interest period might last anywhere from 9 to 21 months, depending on the card.
The catch with balance transfer credit cards is twofold. There are fees to initiate the transfer, which range from 3% to 5% of the amount you are transferring. Also, you must be able to pay off the entire balance before the introductory period expires. If you don’t, you’ll pay interest on the remaining balance at the assigned annual percentage rate (APR) based on your credit.
How to get balance transfer credit cards
Balance transfer credit cards can be an excellent tool to pay down the principle on your debts quickly. They work best if your outstanding debts are revolving credit, as these are the easiest to transfer onto one of these cards.
One of the best choices for a balance transfer credit card is the Citi Simplicity Mastercard. This major credit card has no annual fees and gives cardholders a 0% APR for the first 21 months. There is a 3% balance transfer fee, but no late payment fees. APRs range from 13.49% to 23.49%, depending on your credit. This card is, hands down, the best and longest balance transfer credit card on the market.
Another excellent option is the Citi Double Cash Card, which is also a Mastercard with a generous 18-month 0% APR introductory period. The card has no annual fee but does charge 3% for balance transfers. APRs range from 13.49% to 23.49%, depending on creditworthiness. You might want to choose this card because it is also a rewards card, giving 1% cashback on all purchases and another 1% when you pay your bill.
If you travel and want a balance transfer card that won’t penalize you with foreign transaction fees, check out the Discover it Chrome. This card has a 14-month 0% APR introductory period and allows balance transfers with a 3% fee. APRs after the introductory period range from 11.49% to 23.49%. There is no annual fee, and you get 1% cashback on all purchases as well as 2% back on gas and restaurant spending. This card also entitles you to a free FICO credit score statement every month.
Credit scores range from 300 to 850. Creditors use the scores to evaluate your creditworthiness. An average score is 600-649, good scores range from 650 to 699, and credit scores of 700 or above are considered very good or excellent. Scores below 549 are considered bad and scores from 550 to 599 fall into the poor range.
Are personal loans a better option?
There are several reasons why a personal loan might be a better option than a balance transfer credit card. Let’s assume that not all of your debts are revolving credit, or other credit cards. You could have a combination of credit cards, medical bills, student loans, and high-interest auto loans. If you’re trying to consolidate several different types of debt, it would be easier to pay those off with cash from a personal loan.
One of the biggest reasons to choose a personal loan over a balance transfer credit card is time. If you can’t pay off a balance transfer credit card before the introductory period expires, that method is going to get expensive.
In most cases, the APR on a personal loan will be lower than that on a credit card. With loan terms of up to five years, this can give you longer to pay off your debts at a reasonable monthly rate.
How to get a personal loan
There are several places that you can get a personal loan. Both, major banks and your local credit union issue personal loans. A credit union is a better choice because they generally have more favorable interest rates. Of course, you’ll almost always need to open an account with one of these institutions to qualify for a loan.
You can also apply for personal loans online. The interest rates are just as competitive, and you don’t need to jump through additional hoops to qualify.
Lenders for borrowers with excellent credit
Borrowers with excellent credit and income of over $100k should check out SoFi. This marketplace lender specializes in low-interest personal loans, with APRs starting at 5.95% for a fixed-rate loan. SoFi offers loans from $5,000 to $100,000, with repayment terms as long as seven years. SoFi also has no loan origination fees and no prepayment penalties, so you can pay off your loan as quickly as you’d like.
Another reputable personal loan lender is LendingClub. This online lender is the largest lending marketplace for personal loans, with more than $22 billion funded.LendingClub is a peer-to-peer lender, which assigns you a score based on 25 factors. That score determines your APR, and then individual lenders can fund your loan. Loans range from $1,000 to $40,000 with APRs from 5.99% to 35.89%. There is a loan origination fee of 1% to 6% but no prepayment penalties with LendingClub loans.
Also, check out LightStream for online personal loans. This online lender is affiliated with SunTrust Bank and offers personal loans to borrowers with good to excellent credit.APRs with LightStream range from 1.99% to 14.49% on loans from $5,000 to $100,000. LightStream has no loan origination fees and no prepayment penalties.
What if you have bad credit?
Even if you have less than perfect credit, there are still a few options to get you some cash.
If you want a balance transfer credit card, your choices are limited to a secured credit card. This is a good choice, however, if you want to keep your hands off of your savings while you pay down debt and rebuild your credit at the same time.
Check out the USAA Secured American Express® Card. You can qualify for up to a $5,000 credit limit as long as you have the equivalent amount in a USAA CD account as security. There is no 0% introductory APR with this card, but you can transfer balances from your other cards onto this one if the rate is more favorable. APRs on this card start at 10.4%. This credit card has a $35 annual fee and charges 3% for balance transfers.
For personal loans with fair to poor credit, try lenders like Avant and OppLoans, which lend to borrowers with poor credit and beats some of the costlier alternatives like payday loans and car title loans. Loans are from $1,000 to $10,000, and APRs vary depending on your state and your credit.
Comparing credit cards vs. personal loans
When you compare balance transfer credit cards and personal loans, you should look at several factors. Consider the APR, fees charged, and the total amount that you will spend to pay off your existing debt.
A balance transfer credit card will likely offer you a 0% introductory APR, but afterwards a higher rate will kick in. You need to ask yourself both how long you need to pay off your debt and what sort of monthly payment you can afford.
Interest rates are generally lower with a personal loan than with a credit card, and your payment will remain the same throughout your loan repayment. Predictability is often a plus when dealing with debt repayment and a tight budget.
Balance transfer example
Let’s assume that you have $10,000 in high-interest (28%) credit card debt that you want to pay off in the best way possible. If you kept the card, making minimum payments, it would take 30 years to pay off with total payments exceeding $32,600.
Citi Simplicity Mastercard offers you a 14.24% APR after the 21-month introductory period. During the introductory period alone, you’ll save $4,600 in interest. Even after the introductory period expires, you’ll save over $114 each month compared to your current credit card.
If LendingClub offers you a personal loan at a favorable rate, you might choose this option. For example, a personal loan at 6.95%, with a 1.5% origination fee, for 60 months will give you a payment of $197.78 per month. Total loan payments are $11,866.57, saving you more than $20,000 in interest.
Another thing to consider when choosing between a credit card and a personal loan are your goals to improve your credit. Credit bureaus look for a mix of credit types when they calculate scores. If you only have revolving credit, your credit score would benefit from showing that you have some type of loan, such as a personal loan. So, if you only have revolving credit accounts, you might get a credit score boost by taking out a personal loan.
So, which is the better option?
The best choice depends on the balance of your credit card debt, whether you qualify for a 0% balance transfer credit card, and how quickly you can repay your credit card debt. Another thing to consider is whether you have the willpower to curb your spending when you open a new line of credit.
If your credit is good, you may want to start by transferring all the credit card with a 0% intro rate. Try to pay it off before the intro rate expires. If you can’t, either try to transfer it to another 0% balance transfer credit card or pay it off with a low interest personal loan.