If you’re staring down a credit card bill that just seems to keep growing, it’s time to find better ways to manage your credit card debt. The words “debt consolidation” or “balance transfer” might make your head spin, but they aren’t as complicated as they sound. Each is a different approach to one common end: Making that credit card payment more manageable so you can eliminate debt once and for all.
Understanding Balance Transfers vs. Debt Consolidation
Before you dig in, you need to first understand how both debt consolidation and balance transfers work, as well as how they differ from one another. Here’s an overview:
What Is a Balance Transfer?
A balance transfer occurs when you apply for and transfer your credit card balance to what is called a balance transfer credit card, which is a normal credit card that offers promotional terms like 0% APR on balance transfers for a duration of time, usually 12 to 18 months. If you’re stuck chipping away at a large debt on a credit card with an astronomical APR, transferring it to a 0% APR credit card allows you to pay off your debt faster since you aren’t being charged interest and can chip away at the principal balance.
It’s important to note that balance transfers usually come with a fee, typically 3 to 5 percent of the balance you are transferring. If the amount you’d pay in fees is less than what you pay in interest, a balance transfer might be a good choice for you.
What Is Debt Consolidation?
Another option is debt consolidation, which you can do by applying for a debt consolidation loan; this is a new loan issued to help take multiple liabilities — credit cards, other loans like student loans, personal loans and other debts like medical debt — and roll them all into one loan with one payment. Debt consolidation makes it easier to keep track of your debts so you don’t miss payments or face late fees.
It’s important to note that debt consolidation does not necessarily mean you’ll be paying a lower interest rate. Oftentimes, debt consolidation loans actually come with a higher interest rate, but the convenience of one single payment might outweigh the higher rate for some people.
Pros and Cons of Balance Transfers
Although balance transfers and debt consolidation aren’t the same, they go hand in hand — namely, that many practice debt consolidation by getting a balance transfer credit card. With any financial choice, it’s imperative to weigh the pros and cons. Here are the pros and cons of balance transfers:
Pro: Balance Transfers Buy You Time
The biggest pro of transferring your debt to a balance transfer credit card is that it comes with a 0% APR window. During the no-interest period on your balance transfer card, credit card interest isn’t accruing on your debt, allowing you to pay down your debt faster while saving money.
Pro: You Won’t Pay Interest So You Can Pay Off Your Debt Faster
By transferring your balance from multiple cards to one card with a 0% APR period, you won’t have to pay large chunks of interest spread across multiple card sources. Instead, you can use the money you’d be spending on interest to pay down your principal balance.
Con: You Might Not Qualify for the Card
Even the best balance transfer cards are still credit cards, after all, and if you have bad credit, you might not qualify for the card you want or a rate that makes a balance transfer card worth it. Be diligent and do the math if you have a less-than-stellar credit score — and when you’re at it, be sure to check out ways to bring your credit score back up.
Con: Strict Policy on Late Payments
Often, balance transfer cards can cancel the 0% APR deal if you make a late payment. If you’re not known for your punctuality, put some extra thought into opening a balance transfer card.
Con: You’ll Probably Pay a Fee
Transferring your debt isn’t a free service — usually, it’s accompanied with a balance transfer fee, often to the tune of 3 percent or higher. Do the math and make sure that you’re still coming out ahead when you make the move so you don’t get stuck with even more debt.
Get the Details: How Credit Card Balance Transfers Work
Pros and Cons of Debt Consolidation
Although balance transfers are just one popular method of debt consolidation, consolidation could refer to any type of debt you’re trying to combine — student loans, medical bills, car payments and more. In addition to the pros and cons of balance transfers, consider these facts about debt consolidation. Here are the pros and cons of debt consolidation:
Pro: All of Your Debt Is in One Place
Instead of rifling through multiple bills — and cutting multiple checks — each month, everything you owe will be in one place, which makes it easier to manage.
Con: It’s Still Debt, After All
No matter how you slice the pie, even with a debt consolidation plan in place, you’ll still owe something to someone. Be sure to be diligent about not using your newly freed-up cards to go on a spending spree — your debt didn’t disappear, it just moved.
Con: You Might Pay More in Interest
The convenience of a single monthly payment is not without drawbacks. Debt consolidation loans might make your monthly payment more management, but you might pay more in interest over the life of the loan due to a longer term and potentially a higher interest rate. Debt consolidation loans are typically unsecured personal loans, which often have higher rates than secured loans, such as an auto loan. Due to a lack of collateral, unsecured loans have higher rates to protect the lenders because they are taking on more risk so if you’re consolidating secured loans into an unsecured loan, your rate might increase.
Debt Consolidation vs. Balance Transfers: Which Is Right for You?
Tackling debt has no one-size-fits-all approach. The best debt consolidation method is the one that works best for your financial situation. There are numerous debt consolidation programs available that promise to pluck you out of the red and get you back on track, but before you commit, be sure to read the fine print. If you’re still unsure, consult a financial professional.