A personal loan or a balance transfer card: Not always a no-brainer
A personal loan or a balance transfer credit card? You’re probably thinking the answer is obvious. After all, you have to pay interest on a personal loan and balance transfer plastic comes with a 0% APR.
But hold your horses. Because sometimes the loan’s a smarter choice in spite of that interest. Read on to find out which you should choose.
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When balance transfer cards are a bad idea
There’s no point pretending balance transfer cards don’t often provide unbeatable borrowing opportunities. But they also come with conditions, traps and gotchas that can trip up the unwary. So let’s run through their seven most common pitfalls.
1. You may not get all the money you need
Your new card issuer will give you a credit limit. If that’s not enough to meet your needs, you may need a top-up personal loan anyway.
And every credit application you make will hurt your credit score. So you want to apply as few times as possible.
2. Go-to rates can be high
When the 0% APR period ends, any balance left over will be subject to the card’s standard “go-to” rate, so called for obvious reasons.
And those rates can be eyewateringly high. For example, on the day this was written, the Citi Simplicity® card was offering go-to rates of 16.99% - 26.99% APR (mostly depending on your credit score) at the end of its 21-month introductory period. Others were nearly as high and offered shorter periods.
If you haven’t cleared your debt by the time your go-to rate kicks in, you could find your overall cost of borrowing high.
3. You have a tight window
Many of these cards restrict the time during which you can make balance transfers. That’s usually a month or two. And your new plastic may or may not give you the introductory rate on new purchases.
So fail to act swiftly and you could lose out.
4. Free’s not free
You may pay 0% APR but that doesn’t mean your borrowing’s free. Many cards charge a balance transfer fee.
That’s often 3% of the amount you transfer. That can still be a great deal. But you need to build it in when you’re choosing a personal loan or a balance transfer card.
5. You’ll need good credit
With these deals, credit card companies can’t afford to make losses on loan defaults. So they’re picky about the borrowers they’ll lend to.
Don’t expect this to be an option if your credit’s only fair or poor. Personal loans are available to a wider pool of borrowers.
6. You have to stick to the rules
If you’re so much as a day late with any payment, you can almost certainly kiss goodbye to your 0% APR. Expect that go-to rate to kick in the moment you breach your agreement.
7. It’s still a credit card!
Some of us have iron self-discipline and find zero temptation in the plastic in our wallet. But others of us can’t see a card without maxing it out.
You know which you are. If you’re bad with cards, you’re likely to find yourself with a hefty balance and a high go-to rate when your introductory deal expires.
*TheMortgageReports and/or our partners are currently unable to service the following states - MA, NV
When personal loans are better
In the right circumstances, almost all of those can make a personal loan more attractive than a balance transfer card. But that last one is especially important.
With a personal loan, you borrow a lump sum and pay it back in equal installments over a fixed period. So you can’t be tempted to run up your balance or make only minimum payments.
Sometimes cheaper and easier
Meanwhile, the interest rate you’re likely to pay is likely to be way lower than the go-to one for your plastic. So, if you need to borrow for three, four or five years instead of 21 months (or often less), you may well find the loan comes out cheaper.
The same applies if you’re not organized enough to be sure you’ll make every payment on time — or complete your transfers or purchases within the window you’re given. These gotchas can turn an amazing deal into a nightmare overnight.
How to get a personal loan: Step-by-step guide
Your credit score’s safer with a loan
All credit cards (including balance transfer ones) count as “revolving credit” for credit scoring purposes. And if your balances exceed 30% of your credit limits (a ratio referred to as your “credit utilization”), you could be doing harm to your score. Worse, that can apply to an individual card as well as all your balances and limits taken together.
So if you pile all your existing balances onto one balance transfer card, you could end up seeing your score tumble. One consumer reported on a FICO forum:
Fair warning to anyone looking for a free lunch: I transferred a balance to a Chase zero interest card. By giving myself a 90% utilization on that one card, my score dropped 60 points! (25% utilization overall)
Personal loans and credit scores
Your score should take a small hit when you apply to open any new credit account, including a balance transfer credit card. But, if you keep making payments on time, it should soon recover with a personal loan — and may even improve.
Personal loans count as “nonrevolving credit” for credit scoring purposes. And that means credit utilization rules don’t apply to them.
Weigh up your personal loan or a balance transfer choices
You’ll remember this article began, “A personal loan or a balance transfer credit card? You’re probably thinking the answer is obvious.”
Bet you aren’t now!
Time to make a move? Let us find the right mortgage for you
*TheMortgageReports and/or our partners are currently unable to service the following states - MA, NV
