When to Use a Credit Card Vs. Personal Loan for Debt Consolidation

Debt is like a leech on your bank account — it sucks up your money with interest rates and minimum payments that can quickly drown you if you don’t stay on top of it. If you have debt on multiple credit cards or loans, you might be considering consolidating your debt with either another personal loan or credit card.

Why You Should Consider Debt Consolidation

It might seem counter-intuitive to consolidate debt by taking out a personal loan or applying for another credit card. But when used correctly, it can save you a lot of money in the long run, especially if you’re able to consolidate to a credit card or loan with a lower interest rate. According to the Consumer Financial Protection Bureau (CFPB), debt consolidation can help you lower your monthly payments and make the process of paying off debt easier.

By putting all of your debts under one roof, you can keep better track of your bills and avoid those pesky late fees. And by making your payments on time, you’ll slowly see your credit score improve, allowing you to nab competitive interest rates on a variety of loans.

Read: Here’s Why It’s So Hard to Get Out of Debt

Below are a few scenarios of when you should use a personal loan or a credit card to consolidate your debt.

1. You have less-than-stellar credit: Credit Card

Interest rates on credit cards and personal loans vary by lenders. You might find a credit card with a higher interest rate; other times, you might come across a personal loan with a higher rate. But if your credit score is on the lower end of the spectrum, you’ll probably find it difficult to qualify for a personal loan that offers low rates.

According to the Lending Tree, borrowers who used the site in March 2015 had interest rate quotes ranging from 3.99 percent to 41.7 percent. The average rates for people who took out $10,000 loans with poor credit scores ranged from 23.99 percent to 30.02 percent.

With that said, a balance transfer credit card that offers a low or zero interest might be the best way to consolidate debt in this situation. Many credit card companies offer deals such as 0% APR for the first few months on credit balance transfers, which can be a good way to free up some extra cash that you could spend on monthly interest payments. A plus: Some of these credit cards don’t require excellent credit.

For example, the QuicksilverOne Rewards credit card from CapitalOne is available for people with average credit and offers an 0% introductory APR on transfers until January 2016. And though the APR jumps to 22.90% after that, there is no transfer fee. So, you can put that extra money you save toward your payments.

Of course, there are personal loan options you could possibly qualify for if you have bad credit. These include a home equity line of credit, a loan from a credit union and peer-to-peer loans. But can you get a low interest rate with a low credit score? Again, that depends on your lender.

2. You don’t want your interest rate to increase: Personal Loan

Transferring balances to another credit card could give you a brief respite with low introductory rates, but that might not be enough time to completely pay off your debt. And fluctuating interest rates can hurt just as much as the late fees you’ll be charged if you don’t pay off the debt before the introductory period expires.

Taking out a personal loan with a low, fixed interest rate could be a better way to manage your monthly debt payments. These loans are good for people who already have a decent credit score and don’t want to fall behind. Plus, the fixed interest rate means that you won’t have to worry about shopping around for a new credit card or loan every time the rate increases.

Related: 5 Things Everyone Gets Wrong About Personal Loans

3. You need a quick solution: Credit Card or Personal Loan

Repairing your credit score can be an arduous journey. Thankfully, a credit card or personal loan could quickly help you get back on the road to financial recovery.


Applying for a balance transfer credit card can be done online in a matter of minutes. According to CreditCards.com, you can get instantly approved for a credit card, though other times it might take weeks.

Getting a personal loan can be done quickly as well. Depending on the lender, you might not have to wait a long time to see what your approved amount is. For example, the Lending Club advertises you can apply in minutes and get funding in a few days for personal loans up to $35,000.

More Ways to Eliminate Debt

Before you rush into getting a personal loan or credit card, you might want to talk to a professional first, such as a credit counselor or a certified financial planner. The CFPB also advises asking your creditors if they will lower your monthly payments to help you out.

And also remember that debt consolidation isn’t the only way you can get yourself out of debt. You can use either Dave Ramsey’s debt snowball method, in which you focus on paying off debts with the smaller balances first. Or, you can use the debt avalanche method, where you pay off your debts with the highest interest rates first. Whichever method you choose, take the time to research and weigh the pros and cons to find the best solution for you.

Keep reading: How I Paid Off My $100K Debt in Just 5 Years