Whether you’re drowning in credit card debt or just looking to streamline your payments, there are countless options to choose from when it comes to managing your credit card debt. Two very common solutions for credit card debt management are debt consolidation loans and balance transfer programs. Both of these options for managing your debts have benefits and drawbacks based on your specific financial situation.
What is Debt Consolidation?
Debt consolidation is when you take all of your existing debt, whether it’s from credit cards or loans, and combine them into a single loan. Essentially, you are taking out a new loan and using that loan to pay off your existing balances on credit cards, loans, or even medical debts. This option is often a helpful solution for people who are making payments every month to multiple creditors. Debt consolidation is also beneficial if you are paying high interest on your credit cards, as most consolidation loans have a lower interest rate than credit cards.
The most common type of debt consolidation is through an unsecured loan, which is also referred to as a personal loan or signature loan. In some cases you can consolidate your debt using a home equity loan or even a vehicle loan. However, to keep things simple in this article, I when I refer to a debt consolidation loan I am referring to an unsecured loan.
A debt consolidation loan will have a fixed interest rate and fixed term, which means your monthly payment will not fluctuate based on the balance you owe. A fixed term means you will know exactly when you will have your debt paid off. For example, if your fixed term is 48 months (4 years) you know that if you make all your payments on time you will be debt free in 4 years.
A debt consolidation loan may be helpful in paying off credit card debt if you:
- have multiple debts owed to multiple creditors
- are struggling to pay all your debts on-time every month
- are paying high interest rates and want a lower interest rate
- want to have a definite date for your debt to be paid-off
- want a fixed payment for easier budgeting
A debt consolidation loan may not be helpful if you:
- are not struggling to pay your debts on-time
- cannot get a lower interest rate than what you already have
- are close to pay offing your debts
- only have one or two small debts
What is a Balance Transfer?
So here’s where it can get a little confusing. Balance transfers are technically another way you can consolidate credit card debt, but instead of a loan you are using another credit card to pay off your existing balances. With a balance transfer program you are using a lower interest rate credit card to pay off higher interest rate credit cards. It is possible to transfer only one balance from one credit card to another card as well. However, balance transfers often are most helpful when you are paying on several high interest rate cards and can qualify for a lower interest rate credit card, thus saving you money on your monthly payment.
There are a plethora of balance transfer offers out there at any given time. The key to making balance transfers work for you in the long term in paying attention to what kind of credit card you are transferring your balances to in the first place. While many balance transfer programs offer zero to low interest rates up front, after several months those introductory rates expire and you are left paying the normal rate on the credit card. Which if you’re not paying attention to the fine print, can be just as high or higher than the rates you were paying on before, so read the terms and conditions closely. You would never want to transfer balances from a lower interest rate to a higher rate card, even if they are offering you a great introductory offer.
That being said, you don’t have to wait for a balance transfer program to be offered to you either, most credit cards allow you to transfer balances at any time. By transferring your credit card balances to lower interest rate cards you will have lower monthly payments. However, it is important to remember your monthly payment can and will still fluctuate based on your current balance and the interest rate on your credit card, which can also change at any time. Additionally, if you continue to add to your balance there is no guarantee for when your debt will be paid off.
Balance transfers can be helpful in paying off credit card debt if you:
- are paying on multiple high interest rate credit cards
- can qualify for a lower interest rate credit card
- are not going to continue to add to your balances
- want to only have one credit card payment every month
- have no other types of debts to consolidate, such as an auto loan
Balance transfers may not be helpful if you:
- end up paying a higher rate after an introductory period than your paying now
- plan to continue using your other high interest rate credit cards
- want to consolidate more than just credit card debts into your payment
- still cannot afford to make your monthly payment after transferring balances
A Final Thought About Balance Transfers vs Debt Consolidation Loans
If you are looking for options to make managing your credit card debt easier, either a debt consolidation loan or doing balance transfers can be helpful solutions. The solution that is best for you will depend upon your specific financial situation. This article should help you weigh some of the pros and cons of each option to help you in making your final decision. It’s also a great idea to reach out to a trusted financial institution to help you review your current debts; they will also be able to tell you how debt consolidation versus a balance transfer could affect your credit score.