If you plan accordingly, you can transfer a personal loan to a credit card with a 0 percent promotional rate and save on interest. The key is to pay the debt off before that promotional period ends.
You do have the option of transferring another type of loan balance to a credit card — but ultimately, you might not want to do that.
Balance transfer credit cards enable cardholders to move existing credit card debt onto a new card, usually with a 0 percent promotional interest rate that lasts anywhere from six to 20 months. The obvious benefit is saving a lot of money on interest, since the average credit card APR is currently more than 16 percent. Consolidation is another perk of doing a balance transfer — it’s easier to make one monthly payment than several different ones.
You might be interested in extending these benefits to other loans — personal, car, student or home equity — and you can often transfer those kinds of debts onto a balance transfer credit card (although policies differ from bank to bank). It’s usually best, however, to only use a balance transfer card to lower your existing credit card debt burden. Here’s why:
What to consider before transferring a loan to a credit card
Before you make this move, there are some important things you need to consider:
Your interest rate will be much higher after the 0 percent term expires
At some point, the party is going to end. And once your 0 percent balance transfer offer expires, there’s a good chance your interest rate will skyrocket to something like 20 percent or even 25 percent.
That kind of interest rate is common for a credit card, but it’s probably much higher than the one you’re paying on a car, student or home equity loan. You typically have a lot more time to pay those debts, too. And those debts are more likely to offer other benefits (for example, student and home equity loans can be tax-deductible, and student loans might offer forgiveness and forbearance options). So, it’s important to think about the entire picture, not just the 0 percent window.
Never view a balance transfer card as an excuse to overspend — the best way to use this type of card is to avoid making any new purchases after you make your transfer(s). Once you’ve completed your initial transfer(s), divide how much you owe by the number of months in your 0 percent promotion and pay that amount (or more) each month to ensure you’ll be debt-free by the time interest kicks in.
Balance transfer fees are common
Almost all balance transfer cards charge an upfront transfer fee, typically between 3 percent and 5 percent of the amount you’re transferring. This fee could be well worth it if it helps you avoid a 20 percent credit card APR for a year or more, but it’s a reason to think twice before moving a lower-rate debt to a balance transfer card.
Your credit limit will probably be relatively low
If you’re not already convinced not to use a balance transfer card for anything but credit card debt, consider this: Your balance transfer card will probably have a credit limit that’s much lower than what you owe on your car, student or home equity loan. In fact, Equifax reported the average limit for a credit card opened in January 2021 was just $4,067.
You’ll have to deal with limitations
Balance transfers come with limitations. Let’s say you have $3,000 of credit card debt with a certain bank. You can’t transfer that to a balance transfer card from the same bank. Similarly, if you have an auto loan with Bank XYZ, you can’t move that auto loan debt to a balance transfer card that’s also issued by Bank XYZ.
In addition, some banks are stricter than others regarding which external debts you can move to a balance transfer card and whether they provide balance transfer checks for added flexibility. If you still want to pay off a loan with a balance transfer after reading this, call your issuer’s customer service department before you apply to make sure you can actually do what you want to accomplish.
Benefits and drawbacks of transferring a loan to a credit card
There are both advantages and disadvantages worth considering before you transfer a personal loan balance to a credit card:
- Can save money by temporarily avoiding interest payments
- May make it easier to pay off debt faster
- Might simplify debt repayment
- Balance transfer fees
- Interest rate probably higher after 0 percent term expires
- Harder to pay off debt if you fail to pay card off before 0 percent period ends
Is it worth transferring a loan to a credit card?
Balance transfer credit cards offer an excellent way to get out of credit card debt. For example, let’s say you owe $5,000 at 16 percent interest. If you only make minimum payments, you’ll be in debt for more than 15 years, and you’ll end up paying a grand total of about $10,400.
A much better option would be to transfer that balance to a card such as the U.S. Bank Visa® Platinum Card, which has a 20-billing-cycle and 0 percent balance transfer promotion (after that, the variable APR ranges from 16.74 percent to 26.74 percent). Including the 3 percent or $5 (whichever is higher) transfer fee, you would only have to pay about $258 per month to knock out the entire debt before the interest-free clock expires.
That’s an incredible deal — but the math usually doesn’t work out nearly as well if you’re considering using a balance transfer card to pay off your auto, student or home equity loan. It’s generally better to keep those separate.
If you have a plan to aggressively pay down your debt during the introductory 0 percent period (which can be as long as 20 months), transferring a loan to a balance transfer card can help you avoid pricey interest charges and pay off your debt faster.
However, if you can’t manage to pay off your debt before that period ends you’ll likely end up with a higher interest rate than you had before, which will make it harder to pay off your debt. The key to transferring another type of loan to a balance transfer card is to do the math and plan accordingly before you sign on the dotted line.