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Balance Transfer vs. Debt Consolidation

Last Updated: September 19, 2024

5 min read

Table of contents

What is a balance transfer?

What is debt consolidation?

Which is better for my credit score: balance transfer or debt consolidation?

Key Points:

Balance transfers lets you transfer debt from one credit card account to another with a lower interest rate.
Debt consolidation involves combining many debts into one, sometimes by taking out a personal loan or debt consolidation loan.
You can take on new debt strategies and learn how each can impact your credit score.

If you have too much debt, you understand how it can impact many areas of your life. Without good debt management, it can be incredibly stressful.

It can also hurt your credit score, which makes it harder to secure a car or home loan. It’s no wonder that many people are researching tactics to get out of debt faster. One common question a debtor will ask is, “What’s the difference between a balance transfer and debt consolidation?”

In simple terms, balance transfers are one form of debt consolidation. Both balance transfers and debt consolidation involve moving your existing debt from a higher-interest account to a lower-interest account in order to pay off your debt at a lower interest rate.

Balance transfers specifically involve credit cards, while debt consolidation is broader. For example, at Discover, you can apply for a balance transfer card offer up to your available credit line to transfer high-interest debt to one with a low promotional annual percentage rate (APR). Once approved, you can transfer debt from credit cards, loans, and more.

However, you could also apply for a personal loan or home loan to provide debt relief and consolidate multiple debts into one payment.

What is a balance transfer?

A balance transfer is when you take the balance of the amount you owe from one loan (such as credit cards, loans, and medical bills) and move it to another credit card account. People often use balance transfers to pay off debt at a lower interest rate.

For example, imagine you carry a balance on a high-interest credit card and transfer it to a card with a lower interest rate. You might even have a card with a 0% balance transfer introductory rate. By doing this, you could pay down the balance more quickly because you’re paying less in interest charges.

However, understand that the APR will rise after the introductory period, so make sure you’re aware of what the standard APR will be. There may also be a balance transfer fee, so make sure to read the terms and conditions of each offer.

It’s important to do your homework when considering a balance transfer offer.

Add up the total amount of debt you’re carrying.
Calculate how much you can pay toward the total debt during the promotional period.
Calculate how much you'll pay in interest after the rate reverts to the standard APR.
Compare what you would pay at your current APR to the balance transfer opportunity.
Add in any fees associated with the balance transfer before making your decision.

If you decide to move ahead with a balance transfer, remember that the low promotional APR only applies to the transferred debt. In many cases, if you make new purchases, say on the credit card you made the transfer to, you’ll pay the standard APR for those purchases, which may be higher.

Did you know?

In addition to a 0% balance transfer introductory rate, Discover offers balance transfer credit cards that come with no annual fee, just like all other Discover cards. Compare cards like the Discover it^® Chrome Gas & Restaurant Credit Card to see how you can transfer your balance and earn rewards.

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What is debt consolidation?

Debt consolidation loans move high-interest debts (including credit card balances) into a single, often lower-interest, payment. Consolidation may be a way to simplify or lower your payments each billing period. However, it’s important to remember that this doesn't erase your debt.

There are two main types of debt consolidation loan programs: secured and unsecured. A secured loan has an asset backing it, such as a home, vehicle, or even a retirement fund. An unsecured loan isn’t bound to collateral. Since an unsecured loan is more of a risk to the lender, it typically has a higher interest rate than a secured loan. There may be an exception if the borrower has a very high credit score.

A common type of secured debt consolidation is a home equity loan. If there's a significant difference between your current home value and the mortgage balance, you may be able to borrow against that equity to receive a lower rate than with an unsecured loan.

It can be crucial to research every debt consolidation lender you consider using, as fraud is a risk. A reputable organization will send you everything you need to know about their services without you having to provide any detailed financial information. A reputable debt consolidation lender should also have a license to offer services in your state with accredited and certified counselors. Research credit counseling agencies with your state attorney general and local consumer protection agency before signing on the dotted line.

Which is better for my credit score: balance transfer or debt consolidation?

One option isn’t better than the other for your credit score; it all depends on your own credit history and credit report.

For example, you should take into consideration your revolving credit utilization ratio, which is your total revolving debt compared to your total revolving credit limits. Your credit utilization ratio (the percentage of available credit you’re using) is an important component of the amounts owed category that makes up about 30% of your credit score. Adding another line of credit with a high limit may reduce your overall ratio. With a lower interest rate, you can pay more toward the principal every month. This can lower your debt in the long term.

One thing to watch out for with balance transfers is unintentionally increasing your credit utilization ratio by canceling cards once you transfer your debt. For example, if the limit on the new balance transfer credit card you open is $10,000 and you cancel your old credit card after transferring $9,500 worth of debt, your credit utilization rate will jump to 95%. This can have a negative impact on your credit score. It may be advantageous to keep those old cards open, even if you don’t use them often. Length of credit history typically contributes to about 15% of your credit score, so keeping them will help.

Balance transfers and debt consolidation loans can both be effective approaches if used responsibly. Whatever you decide, it’s important to review your options and choose what works best for your situation.

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