Credit cards or personal loans: What’s best for debt consolidation?

By Nicole Comendador

November 30 2023
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When it comes to debt consolidation, Australians have several options at their disposal. Among the most common are credit cards and personal loans.

credit cards or personal loans what s best for debt consolidation

Each has its own set of advantages and potential pitfalls, and the best choice often depends on an individual’s financial situation and goals. Let’s break down both options to help you decide which is best for consolidating your debts.

Credit cards for debt consolidation

Using a credit card to consolidate debt typically involves transferring balances from multiple high-interest cards to a single card with a lower interest rate, often a card with a 0 per cent balance transfer offer. This can simplify your payments and potentially reduce the amount of interest you pay.

Pros:

Promotional offers: Many credit cards offer introductory periods with 0 per cent interest on balance transfers. This can provide a window of opportunity to pay down your debt without accruing additional interest.
One payment: Consolidating your debts onto a single credit card means you only have to worry about one payment, making it easier to manage.
Flexibility: Credit cards offer flexible repayments with the option to pay more than the minimum due each month, which can help you pay off the balance faster.

Cons:

Reverting interest rates: After the promotional period ends, the interest rate may revert to a higher rate than some personal loans, which could end up costing you more in the long run.
Balance transfer fees: Some credit cards charge a fee to transfer your balances, which could negate some of the savings on interest.
Credit score impact: Your credit score could be impacted if your credit card balance is close to the credit limit, as it increases your credit utilisation ratio.

Personal loans for debt consolidation

A personal loan for debt consolidation involves taking out a new loan to pay off multiple debts. This new loan often has a lower interest rate compared to the average rate on your previous debts, and it comes with a fixed repayment period.

Pros:

Fixed interest rates: Many personal loans offer fixed interest rates, which means your repayments remain the same for the duration of the loan.
Set repayment period: Personal loans have a defined term, which can assist with budgeting and ensure your debt is paid off within a specific time frame.
Potentially lower rates: If you have a good credit rating, you may be eligible for a personal loan with a lower rate than your credit card, potentially saving you money on interest.

Cons:

Upfront costs: Some personal loans come with origination fees or other upfront costs that should be considered when calculating the total cost.
Less flexibility: Unlike credit cards, personal loans have fixed repayments and typically don’t allow you to redraw the balance you have paid off.
Early repayment penalties: Some lenders charge fees for early repayment, which could discourage you from paying off your loan ahead of schedule.

What’s best for you?

The right option for debt consolidation will depend on various factors, including:

The amount of debt you have
Your current interest rates
Your credit score
Your ability to pay off the debt within the credit card’s promotional period
Your discipline with repayments

If you can pay off the consolidated debt during a credit card’s interest-free period, and you’re disciplined enough to stick to a repayment plan, a balance transfer credit card might be the way to go. However, if you prefer a structured repayment plan and a clear end date, or if you have a larger amount of debt, a personal loan might be more suitable.

It’s vital to crunch the numbers, taking into account all fees and interest rates, and to consider your financial habits. Whichever option you choose, the goal is to reduce the interest you’re paying and to get your debt under control. It’s wise to seek advice from a financial adviser to ensure that your choice aligns with your long-term financial strategy.

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