Consolidating Debt: Loans vs. Credit

Consolidating Debt: Loans vs. Credit

Having credit card debt can be a worry, especially if you feel like the outstanding balance is increasing despite making payments on a monthly basis.

Generally speaking the interest rates on credit cards is quite high which is why debt can quickly spiral out of control. Many then take out more cards to supplement their spending subsequently leaving themselves with even more debt.

This is why it is crucial that you act upon your credit card debt as soon as you feel it’s getting out of control. The two most popular methods of consolidating credit card debt are 0% balance transfer cards and personal loans. Throughout this article we are going to weigh up the pros and cons of these two methods and hopefully help you to decide which is most suitable for you.

Personal loans – The Advantages

Using personal loans to consolidate debt is relatively easy to do. You simply take out the loan and then use it to pay off the outstanding balances on each of the credit cards you have.

The good news is that personal loan rates are at their lowest for a number of years with a large amount of providers now offering their mid-range (£7,500 – £15,000) personal loans at rates of below 5%.

Arguably the best thing about using personal loans is that you are able to consolidate all of it into one monthly repayment. What’s more you can alter the loan term to makes the loan repayments affordable for you. This makes it very easy to budget for and manage alongside other monthly expenses.

Loan providers will also allow you to set up a direct debit on a day that suits you, by ensuring that the direct debit is set up close to your payday you will ensure there are always sufficient funds in your account.

Personal Loans – The Disadvantages

In order to be eligible for the lowest rate personal loans you will have to have a very good credit history and a solid source of income. Having large amounts of outstanding debt may affect your chances of approval especially if your level of credit utilization is high.

As I outlined above, you’ll find the lowest rates on loans of between £7,500 and £15,000, if you don’t need this much money then you’ll probably find that the rates are considerably higher. For example if you need less than £2,000 then you’ll probably find yourself paying north of 15% APR. In this case, a 0% balance transfer card will probably be a much more suitable option.

0% Balance Transfer Cards – The Advantages

0% balance transfer cards work on the basis that you are able to transfer existing debt over to them and then pay no interest on the balance for an introductory time period. Balance transfer card providers will charge a small fee which will be based on a percentage value (usually around 3%) of the outstanding balance.

Now is also a good time to take out a balance transfer card as competition amongst providers is hotting up. The current market leading card allows you to pay no interest for an introductory period of 30 months meaning you have 2.5 years to pay it all off. If you fail to repay the full balance within the interest free time period, the remaining balance will be subject to the lenders standard rate which will be outlined on the credit agreement.

Balance transfer cards are also relatively easy to budget for, by calculating exactly how much you need to repay on a monthly basis you can then set up a direct debit and avoid all interest. E.g. if you have £3,000 worth of debt and you take out a balance transfer card with a 24 month interest free period you know you need to pay off at least £125 per month to avoid all interest.

0% Balance transfer cards – The Disadvantages

Arguably the worst thing about using a credit card to pay off other credit cards is that you may fall into some bad habits that you’ve picked up in the past. For example, if you have a tough month where money is tight then you may only pay the minimum payment. If this struggle then continues you may fall into the minimum payment trap and before you know it your interest free period is over and you still have a large balance on the card. However, this can all be avoided by setting up a direct debit for a fixed amount each month.


Your situation is likely to determine which option is best for you. Generally speaking if you have large amounts of debt and need over 2.5 years to repay it then a personal loan would be better for you. If however you are confident that you can repay the amount within 2.5 years and you want to avoid interest a balance transfer card would probably be best for you.