Choosing Between a Loan and a 0% APR Card To Get Out of Debt

Wells Fargo Platinum Card is no longer available on Select. Please visit our list of best balance transfer card and Best Wells Fargo credit cards for alternative options.

If you’re struggling with a lot of credit card debt, using a personal loan to consolidate debt can seem like a silver bullet.

One of the most talked about benefits of using a debt consolidation loan is that it helps simplify your payments. Instead of making payments to several credit card accounts with variable APRs, you can pay them all off with a personal loan and then pay the new lender a fixed amount each month.

However, the biggest question to ask yourself when considering a debt consolidation loan, according to Shanté Nicole Harris of Financial Common Cents, is: How much interest will you actually save?

Harris argues that doing a balance transfer with an interest-free credit card is a better option if you can qualify for such a card. But as many major card issuers including Capital One, Discover and American Express, are withdrawing their balance transfer offers amid the current economic downturn – this option is becoming less and less available to consumers. many consumers.

Below, CNBC Select spoke with Harris about how to choose between a personal loan or a 0% APR credit card when you want to pay off high-interest debt.

Harris, who paid off more than $50,000 in debt between 2015 and 2019, is a big proponent of using balance-transfer credit cards in place of personal loans to pay off debt. With a limited-time promotional 0% APR, the balance transfer card allows you to pay interest-free on existing debt for up to 21 months. This can easily save you hundreds of interest payments.

Depending on your situation, you can also transfer more than one credit card balance to a new card (as long as the total balance doesn’t exceed your credit limit), and you can sometimes transfer your credit card balance. a family member to help them. outside.

Some of the best interest-free credit cards that offer balance transfers are the Wells Fargo Platinum, Citi Simplicity® Card, and US Bank Visa® Platinum Card.

However, balance transfer cards typically require good-to-excellent credit, and they have other limitations. If you have a lot of debt, it can easily exceed your balance transfer limit (which is often lower than your actual card limit), leaving you with an extra credit card to keep track of. Most cards also charge a balance transfer fee of 3%, unless you choose a free alternative like the Wings Visa Platinum Card.

You can use a personal loan to simplify your credit card payments. But there are other benefits to consider.

Typically, personal loans have a lower fixed-rate APR. This means your interest will be on hold and you will have to pay the same amount every month until the loan is paid off. Loan terms can range from a few months to three years. Longer terms often come with higher interest charges.

Unlike a credit card which is revolving credit, a personal loan is a form of installment credit. When you complete a personal loan, you’re well done. Meanwhile, the credit card’s APR will switch to the standard purchase APR when the first interest-free period ends, and you’ll still be able to make purchases with the card even after it’s paid off. (We recommend keeping your credit usage to no more than 10% to 30% and paying in monthly installments to avoid more debt.)

It’s also sometimes easier to get a personal loan than a credit card, something to keep in mind if you have an average or decent credit score, especially as it becomes increasingly difficult for card companies to get approved for you. credit. Several lending institutions, both traditional banks and online peer-to-peer platforms, offer loans to a wide range of consumers.

While personal loans are convenient, Harris argues that you should first make sure that a loan is actually going to save you money.

“Sure, there’s the convenience of paying a month, but it’s not really a smart move if the interest rate on your new loan is going to be higher than your current card,” she says.

Choosing a card with an introductory 0% APR is the best way to save on interest, but if you don’t qualify for this option or if you need a longer term to repay, you’ll want to shop for the low. – pay interest on personal loans.

At current interest rates, the average consumer credit card stands at an APR of about 16.6% according to the most recent Fed data. Meanwhile, the average APR for personal loans over 24 months is 9.63%.

Hypothetically, if you had $10,000 worth of credit card debt on a card with an APR of 16.61%, you would pay a total of $1,751.15 in interest if you paid it off in two years (according to the theory. Experian’s APR calculator). If you take out a personal loan at 9.63% APR, you’ll pay $964.34 in interest over the same two years. This would be a savings of $786.81.

But just because most personal loans offer lower interest rates than credit cards doesn’t mean every personal loan will. LightStream, a popular online loan company under SunTrust Bank, advertises a range of APRs ranging from 5.95% to 19.99% depending on the amount you’re borrowing, loan term and credit history. your.

“Remember that you must also qualify for the loan you’re trying to get,” advises Harris. Most lenders allow you to do a soft investigation and find out if you’re pre-approved, and there are even some third-party sites, like LendingTree, that help you compare. suggestions.

Select now has a facility where you can enter your personal information and match personal loan offers without affecting your credit score.

A personal loan can help you get out of debt faster if the interest rate is lower than your credit card. While it’s beneficial to simplify your monthly payments, the biggest reason to consider a personal loan is if you can get a lower interest rate than you’re paying.

If you have good credit or more and a moderate amount of credit card debt, consider signing up for a transfer credit card with a 0% discount period, unless you need more time to pay off your debt.

Information about the Wells Fargo Platinum Card and the Wings Visa Platinum Card has been independently collected by Select and has not been reviewed or provided by the card issuer prior to publication.