Balance transfer vs debt consolidation loan: which one suits your situation?

A balance transfer suits credit card debt you can clear inside the promotional window. A debt consolidation loan suits debt that needs longer than that, or debts beyond credit cards.

Both replace debt you already have with a new product, however they work very differently once you’re in them, and the right one depends on how much you owe, how quickly you can realistically pay it off, and whether credit cards are the only debts in the picture. That’s the decision this guide walks through. (If you want consolidation loans, balance transfers and personal loans generally laid out side by side, that comparison has its own guide: compare debt consolidation, balance transfers and personal loans.)

What each one does

A balance transfer moves your credit card balance onto a new credit card that charges 0% (or a low promotional rate) on the transferred amount for a set window, usually somewhere between 6 and 24 months. A debt consolidation loan is a personal loan that pays out your existing debts, so you’re left with one repayment, at one rate, over a fixed term.

The transfer mechanics (the one-off transfer fee, what happens to the old credit card, what the window does and doesn’t cover) are covered on Moneysmart’s balance transfer page. What matters for the decision is the repayment side. During a transfer window there’s no set repayment beyond the credit card’s minimum, so how fast the balance falls is up to you. A consolidation loan charges interest from day one, however the repayments are set when the loan starts and the debt ends on a known date.

What happens if you don’t clear the balance before the window ends?

Whatever’s left starts being charged at the “revert rate” (the ordinary interest rate the credit card charges once the promotional window ends, generally much higher than the promotional rate, and listed in the credit card’s key facts before you apply).

This is the part of the decision that’s easy to get wrong, because the window only works in your favour when the balance you move is actually cleared inside it. Below is what that looks like for someone who moves $6,000 and clears half:

Illustrative example at an assumed 0% promotional rate and 21% revert rate. Not an offer, quote or advertised rate.

The transfer still helped here (a year of paying no interest is a year where every dollar comes off the balance), however clearing the whole $6,000 inside the window needed $500 a month, not $250. The difference is another 14 months of repayments and ~$397 in interest. That’s also assuming nothing new goes on the credit card in the meantime, because new purchases generally aren’t covered by the promotional rate.

So, before choosing a transfer, do the division: the balance you’d move, divided by the months in the window. If that monthly number doesn’t fit your budget, you’ll probably still owe something when the window ends, and the revert rate is what that leftover amount will cost you.

The trade-off on a consolidation loan

With a consolidation loan there’s no month-to-month decision to make. The repayments are set when the loan starts, the term has an end date, and the balance goes down on a schedule you agreed up front, whether or not the month felt tight. For many people that structure is the reason to choose the loan, and it can also roll in debts a balance transfer generally can’t: a personal loan, Afterpay or Zip balances, an overdue bill or two (a balance transfer generally moves credit card debt only, and each credit card provider sets which balances it will accept).

The trade-off is the term. A longer term lowers the repayment, however you’re paying interest for longer, so the loan may cost you more in total. A shorter term costs less overall, however the higher repayment needs to fit your budget each month. Neither is wrong. Some people take the longer term because the lower repayment is what makes the loan workable, which is fine as long as you’re choosing it knowing the total cost. The working-out for your own debts has its own guide: how much consolidation could cost or save, and when you’re ready to put actual loans side by side, how to compare debt consolidation loans covers comparison rates, fees and terms.

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Which one suits your situation?

A balance transfer suits credit card debt you can clear inside the window. The balance is small enough that the division fits your budget, credit cards are the only debts you’re moving, and you’re confident you won’t add new spending to the new credit card while you pay it down. Used that way, the window can mean a long stretch where every dollar you pay comes off the balance.

A consolidation loan suits debt that needs longer than a window. The balance is too big to clear in a year or two, there are other debts alongside the credit cards (a personal loan, Afterpay or Zip balances), or you’d rather have one set repayment with a known end date than a repayment that’s up to you each month.

Both involve applying for a new credit product, and neither approval is guaranteed. The provider assesses your application, and you may qualify subject to their assessment. (If you’re still weighing up whether to consolidate at all, start with is debt consolidation a good idea.)

If a loan is the direction you’re leaning, you can see where you stand before applying anywhere. WeMoney isn’t a lender. It’s a money management app with a matching service (BrightMatch) that shows you lenders from our panel whose criteria you may fit, before any application is made.

Pro tip: BrightMatch uses soft checks only, so there’s no damage to your credit file, and no hard checks a lender can see.

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When neither is right

A balance transfer and a consolidation loan both help when the problem is interest, meaning debt at rates that are costing you, with repayments you can still manage. Neither helps when the repayments themselves are more than you can afford, and from there a new credit card or a new loan is rarely the right first move. Your existing lenders have hardship teams whose job is to work out a change to your repayments with you, and the National Debt Helpline on 1800 007 007 is free, independent and confidential. The financial counsellors there do exactly this work.

It’s also completely fine to do neither: if the balance is small and nearly paid off, or a transfer fee would be bigger than the interest you’d save, keeping the debt where it is and paying it down directly may be the better move.

Key points

• A balance transfer moves credit card debt onto a new credit card at a promotional rate for a set window, and a debt consolidation loan replaces your debts with one personal loan on a fixed term.
• A transfer works in your favour when the balance is cleared inside the window. Whatever’s left is charged at the “revert rate”, and paying more than the credit card’s minimum each month is up to you.
• Moving $6,000 and clearing half inside a 12-month 0% window leaves $3,000, which takes ~14 more months and ~$397 in interest at $250 a month once a ~21% revert rate applies (illustrative).
• A consolidation loan sets the repayment and the end date, however a longer term can lower the repayment and still cost more in total, so choose the term deliberately.
• If the repayments themselves are unaffordable, lender hardship teams and the National Debt Helpline (1800 007 007) come before any new credit card or loan.

This article is general information only. It doesn’t take your circumstances into account.

Sources

• Moneysmart, Credit card balance transfers
• Moneysmart, Consolidating and refinancing debts
• Moneysmart, Personal loans
• National Debt Helpline