Credit card balance transfer vs. debt consolidation loan

By   |   Updated 4th May 2021

Girl in dress questioning
  • Credit card balance transfers have very low interest rates, typically for 12 months or longer.
  • Debt consolidation loans have higher interest rates, but repayments can be spread out for up to 7 years.
  • Significant differences exist in interest rates, fees, and repayments.

Which works best for debt consolidation – a credit card balance transfer or a debt consolidation loan?

If you would like to organise your own debt consolidation program, rather than using a debt management service, there are two simple DIY options available. One is a credit card balance transfer, and the other is a debt consolidation loan.

The two options work in a similar way. The balance transfer card’s credit limit, or the debt consolidation loan funds advanced, are used to combine several loans into a single, easy-to-manage debt.

Available loan terms

  • Balance transfer. Introductory offers at 0% interest, or low interest, typically last for between 6 and 30 months. You can postpone paying off the full balance beyond the expiry of the introductory offer if you wish, but in most cases you’ll pay an eye-wateringly high penalty interest rate of 20%+ p.a.
  • Debt consolidation loan. Typical loan terms range from 18 months to seven years.

A debt consolidation loan clearly offers a better choice of longer loan terms, a major plus if you have a high level of debt and need to keep monthly repayments as low as possible. However, the longer your loan term, the more interest you’ll pay in total.

Application process

  • Balance transfer. Complete an online application in around 10-15 minutes if you have all details to hand. Initial response may come back in minutes, but it could take several days for final approval. The card issuer will organise the balance transfers for you, so it should all go smoothly if you have provided full and accurate details. If you want to close the old card accounts, you will need to do that yourself.
  • Debt consolidation loan. Complete an online application in around 10-15 minutes if you have all details to hand. Some debt consolidation loan lenders say that they will provide a response within five hours, and deposit the funds into your bank account the next business day after full loan approval. When funds are deposited into your bank account, you must arrange to pay off the old card and loan debts yourself, and it may be a condition of the loan that you complete this task within few business days of receiving the funds. Some debt consolidation loan lenders will, however, pay off those debts on your behalf instead of giving the loan funds directly to you.

There’s not much to choose between the two application processes as far as timing goes, but balance transfers win by going the extra mile in always organising the paying off of your old debts.

Debt types able to be consolidated

  • Balance transfer. Only limited types of debts can be transferred to a balance transfer credit card: other credit card or charge card debt, store card balances, and, in the case of credit cards issued by Citi (including Coles, Qantas Money and Virgin Money cards), personal loan balances.
  • Debt consolidation loan. You can use a debt consolidation loan to clear almost any kind of debt, especially when the lender deposits the funds into your bank account, rather than sending payments to your creditors, and leaves you to pay off the debts yourself. You can include, for example, credit card balances, other personal loans and car loans, utility bills, medical bills and tax debt.

Debt consolidation loans are more flexible than balance transfers when it comes to the types of debt that can be consolidated.

Likelihood of approval

  • Balance transfer. You’re more likely to be approved for a balance transfer if your credit score is in the range Average to Excellent (about 620 and over for Equifax and Experian scores, 500 and over for illion scores). A score lower than this could see your application being rejected.
  • Debt consolidation loan. Some debt consolidation loans specify that applicants must have a Good or even Excellent credit rating. However, there is still hope if you have a poor credit score because you may be able to get a secured loan (where you offer collateral, such as your car or house) or agree to pay a higher interest rate.

In many cases it will be easier to get approval for a debt consolidation loan than for a balance transfer.

You can get a good idea of your chances of being approved by finding out what your credit score is before you apply. Sign up on Finty and get your free credit score.

Set-up cost

  • Balance transfer. Many balance transfer credit cards charge an upfront balance transfer fee, typically 1%-2% of the balance amount being transferred. Additionally, many balance transfer cards have an annual fee. If you don’t intend to use your card for purchases while you have an unpaid balance transfer on the card (a good idea, since you’ll most likely forfeit your interest-free days on purchases until the balance is repaid in full), then you’ll also need to count the annual fee as part of your set-up cost. Count the second year’s annual fee as well if your balance transfer offer lasts for more than 12 months. However, if your new balance transfer card has no balance transfer fee and no annual fee, then your set-up cost is zero. So, for a $5,000 balance transfer where the offer lasts 12 months, for example, set-up costs could typically range between $0 and $200 (a 2% transfer fee of $100 plus an annual fee of $100).
  • Debt consolidation loan. Most (but not all) debt consolidation loans have an application fee, typically between $150 and $500. The application fee is refunded if your application is rejected or if you decide not to go ahead with the loan.

Although both balance transfers and debt consolidation loans can have a zero set-up cost, it is more likely than not that some cost will be involved, and that the cost to set up a balance transfer will be lower than the set-up cost of a debt consolidation loan for the same amount.

Ongoing cost

  • Balance transfer. If you can pay off your transferred balance before the end of the 0% introductory offer, the ongoing cost will be zero (since any annual fee has been included in the set-up cost). But if you continue to carry your balance when the offer expires, your ongoing interest cost will be very high – potentially as high as 20%+ p.a.
  • Debt consolidation loan. Ongoing interest costs are unavoidable, and will usually fall in the range 6%-20% p.a., depending on your credit rating. Some loans may also have a monthly service fee of around $10, further adding to the cost, and there could be an early exit fee if you want to pay the loan off early.

While balance transfers have the potential to be free of interest charges, debt consolidation loans always incur interest costs.

Managing repayments

  • Balance transfer. The credit card issuer will only ask you to make minimum monthly repayments of around 2% of the balance. So, you’ll need to practise strong financial discipline to make sure that you either make substantial monthly repayments, or make regular deposits in a savings account that you can withdraw to repay the full balance just before the offer expires. You’ll also need to diarise the date of the offer expiry and/or set an alarm, in order to avoid paying a high revert interest rate if you miss the date.
  • Debt consolidation loan. The lender will tell you how much you need to repay each week, fortnight or month, to gradually pay off your principal and cover interest charges. The discipline is being enforced by the lender, so you just need to make sure you pay on the required dates, ideally by setting up a direct debit from your bank account.

A balance transfer requires a lot more work and financial discipline from the borrower than a debt consolidation loan does.

Comparing the cost

If you had $5,000 in debts that you wanted to consolidate and repay over two years, the typical comparable costs would be:

Balance transfer

Typical offer: 24 months @ 0% p.a.

Fees: balance transfer fee of $75 (1.5% of amount) and an annual fee of $100 x 2 years.

Total cost: $275

Debt consolidation loan

Typical offer: 24 months at 10% p.a.

Fees: $537 in interest charges plus a one-off application fee of $150.

Total cost: $687

The final analysis

You’re likely to be better off with a balance transfer if:

  • You believe you can repay your total debt within two years or less;
  • You would prefer your card issuer to organise paying off your old debts;
  • Your existing debts are only on credit cards (unless transferring to a Citi card, in which case transferring a personal loan debt is also OK);
  • You have a good credit score;
  • You’re looking for low set-up and ongoing costs;
  • You’re prepared to create your own repayment schedule.

But a debt consolidation loan may suit you better if:

  • You need several years to repay your debt;
  • You’re prepared to handle paying off your old debts yourself;
  • Your existing debts are a mix of credit cards, loans and other bills;
  • Your credit score is on the low side;
  • You’re prepared for higher set-up and ongoing costs;
  • You want your lender to give you a fixed repayment schedule to stick to.