Is Debt Consolidation Better than a Balance Transfer Card?

Couple managing the debt

Not all debt is evil. Debt is a tool that allows us to make major purchases like homes or vehicles on affordable terms. Responsible use of debt allows us to weather rough times while still putting food on the table and meeting basic needs. But sometimes, you need a bit of help organizing and paying it off. Let’s look into debt consolidations versus balance transfer cards.

Debt Consolidation Loans

The idea behind debt consolidation is simple. You owe different amounts of money to many different places under many different terms. The constant payments coming due are overwhelming – sometimes more than you even make in a month. Half the time you’re late because you can’t afford to pay for everything, and the other time you’re late because you simply can’t keep track of it all.

A debt consolidation loan is the most common solution to help you out of the swamp. It’s basically a personal loan with a specific purpose – debt consolidation – and traditional loan terms. A debt consolidation loan is generally unsecured and carries a fixed interest rate. “Unsecured” means you’re not offering up collateral as security for the loan. If you’re dealing with serious debt, it’s unlikely you have substantial collateral other than possibly your home, and we don’t want that on the line if god forbid something were to go seriously wrong and you couldn’t make your payments. “Fixed interest” means that whatever interest rate you agree to at the time of the loan remains the same over the life of the loan, making your monthly payments consistent and thus easy to budget for.

Advantages of Debt Consolidation Loans

There are numerous advantages to the right debt consolidation loan:

  • It replaces multiple monthly payments to a single monthly payment. This means stretching your total debt out over a longer time period, so that each monthly installment is less than you were trying to pay in total each month
  • Paying off multiple creditors means no more late charges or penalties from multiple places
  • The right debt consolidation loan may carry a lower interest rate than the average you’re currently paying to various creditors, especially if you factor in those late charges and other fees we just mentioned
  • A lower overall monthly payment means more money freed up to take care of your priorities and those you love. While paying down your debt is a priority, it’s rarely your ONLY priority

Disadvantages of Debt Consolidation Loans

Let’s be equally honest about the potential disadvantages of a debt consolidation loan:

You still owe the money. This isn’t actually a disadvantage so much as a reality check. It’s easy to overlook the fact that taking more effective control of your debt isn’t the same as your debt going away – it’s just not in charge anymore.

If you’ve been struggling with debt, you may not have a great credit history or a high credit score. That doesn’t mean you don’t have options. There are reputable online lenders who specialize in situations just like yours and who offer debt consolidation for poor credit.

Realistically, however, your interest rates may not be as favorable and there could be upfront fees for getting started. Pay attention to the details and don’t take a bad deal out of desperation. Still, the chance to take control of your debt and begin rebuilding your credit may still be worth it. Bad credit doesn’t have to be a permanent condition.

Balance Transfer Credit Cards

You’ve no doubt seen the ads and maybe received an offer or seven in the mail recently. “No interest on balance transfers!” “Zero percent APR for 24 months!” “You’re Pre-Approved to Apply (**approval not guaranteed**)”

What about it? Are these low-interest or no-interest credit cards a good option for debt consolidation?

Maybe. But only in some very specific circumstances. If most of your current debt is credit card debt, and your current credit cards carry relatively high interest, a balance transfer might be a good move. You should first make sure you know what rates your cards are actually charging, which isn’t always as easy as it sounds. Somewhere on the same website you use to check your balance or make payments, there should be information about the interest you pay, usually expressed as a particular amount or percentage on top of this or that current market rate. That’s how APR works – you start with a relatively low rate, then it varies with market rates periodically. You can end up paying way more than when you started, or sometimes a little less.

If you can’t find it, call the card company. They’re legally obligated to explain this to you, and they don’t exactly try to hide it, despite it being a bit tricky to decipher on the website or those periodic “policy updates” they mail out. Until you know this rate or the formula used to determined your rate, you can’t compare it to the new card you’re considering.

Be Careful of Credit Card Rates

Be Careful of Credit Card Rates

Now you need to pay particular attention to the MULTIPLE rates being offered by the new card. Presumably, it’s promising you a year or more at some ridiculously low rate or zero interest or whatever. Does that apply to transfers as well as new purchases you might choose to make with the card, or only to one or the other? More importantly, what happens AFTER the introductory period? What will the interest rate be then? You don’t want to end up worse off than you were before.

Advantages to Balance Transfer Cards

If you’ve read all the small print and run the numbers, the biggest advantage is that a balance transfer card can conceivably save you serious money. Like with cell phone plans or cable TV packages, it seems it’s always easier to get a great deal from the company that wants to steal you than from the company who claims they’d like to keep you.

If you care about points or miles or rewards or cash back programs, a balance transfer card gives you the opportunity to move from a card that doesn’t offer the features you want to a card which does.

Most of all, balance transfers between credit cards are pretty straightforward compared to traditional loans. You fill out a little basic information, and if you’re approved, it’s almost like charging the debt from your old card onto your new card- quick and painless, more or less.

Disadvantages to Balance Transfer Cards

The biggest is that eventually, those promotional rates end. I realize we’ve already covered this, but it seemed worth repeating.

The other danger is similar to that of a debt consolidation loan. Once you transfer your balance to the new card, you suddenly have 2 or 3 credit cards with the same high limits and zero balance on them, just begging you to use them again.

If this is going to be a temptation, then close them. Eliminate the temptations. That’s not the ideal choice, but it’s better to cut them up than to fill them up.

A better option is to lock them up. Put them in the safe or somewhere else secure in your household. The available credit will help your credit score and you can always access them in emergencies. It’s best to get them out of your wallet or purse, however – no sense leaving Oreos around if you’re serious about your diet, right?

How to compare balance transfer cards

In Conclusion

No matter what your debt situation, you have options. It may not feel like it, but there’s almost always a way forward. And look at it this way… the more hopeless it feels, the less likely it is that things could honestly get much worse, right?

Stay safe, stay patient, and kind with one another, and keep following expert medical advice. And if you decide to tackle some debt management while you’re at it, we can connect you to reputable online sources who would be happy to help while maintaining COMPLETE social distancing. Just let us know when you’re ready!

You can do this.


Debt Consolidation Truths and Myths Revealed

Young business man wearing a suit against a white bricks wall looking up.

Debt consolidation is one of the ways you can tackle your debt. Debt consolidation helps simplify your payments by rolling your multiple bills into one payment and it can often lower your interest rate and help you get out of debt faster. However, if you want debt consolidation to work then you need to know the debt consolidation truths and myths.

There are a lot of misconceptions about using a loan for debt consolidation. Knowing debt consolidation truths and myths can help you make the right decision for your financial situation.

Top Debt Consolidation Myths

There are a lot of beliefs about debt consolidation. Is debt consolidation expensive? Does debt consolidation impact on your credit score? Keep reading and get answers about these questions about debt consolidation myths.

Debt Consolidation Reduces Debt

One of the biggest debt consolidation myths is that it doesn’t actually reduce your debt. Your debt also isn’t forgiven and instead you are paying off your whole debt with a loan. If you want to eliminate or reduce your debt then you need to look into debt settlement, which usually involves hiring a debt settlement company to work with your creditors to reduce your debt. This may sound like a better option and a good choice but it usually destroys your credit and can be costly. This is why debt consolidation is often chosen instead of debt settlement, despite different debt consolidation truths and myths out there.

You Always Will Save on Interest

One of the reasons many people choose debt consolidation is because it lowers your interest rate but this isn’t always the case. If your credit is strong then you may get an interest rate on a loan that is actually lower than your rate on your current debt. Total interest costs can increase if you extend your repayment terms.

Use a debt consolidation loan to calculate this and see how different rates and loan repayment terms can impact your payments. It also helps to see an example.

If you have an interest rate of 15% on your $20,000 in debt and you are paying $600 a month then you end up paying $25,800 over about 3.5 years. However, if you use a debt consolidation loan that has an interest rate at 10% that you take seven years to pay off, your payment is much lower at $332 but your total payment will be $27,890. As you can see, your payments are lower, as is your interest rate, but you will be paying more in the long run.

When You Do Debt Consolidation Your Credit Score Will Suffer

Can debt consolidation impact on your credit score? The truth is that you will need a hard credit pull when you are getting a loan for debt consolidation. However, this will usually only drop your score by a few points and isn’t usually a big deal. Depending on how debt consolidation works for you, you may actually improve your credit score since you are better able to pay off your debts. Any short term hit to your credit can be worth it if it can allow you to stay on top of your debt repayment plan and actually be in a better financial situation.

Debt Consolidation Is Expensive

The interest rate on loans you use for debt consolidation can vary due to different factors, including your lender, but on average they are lower than the average interest rate on a credit card. Many loans don’t have any extra fees. However, some loans do have origination fees to cover loan processing or fees for late-payments so it’s important to do your research if you are looking to save money, be sure to shop around. Find a lender that won’t charge a fee for paying off your loan early. Check the APR, which includes the origination fees, to make it easier to compare costs when researching different lenders.

Debt Consolidation Is Time Consuming

Many lenders use an online loan application process that will allow you to go through the process quickly using a secure online portal. The entire process, from your application to the funding of money, may only take a few days to a week. Some people think that you have to go back and forth with a lender and have a lot of meetings but you don’t have to do that. Preparing documents, such as bank statements, before applying can make the process even faster. While this won’t change your rate, you can get your money quicker and pay off your debt to start saving.

Debt Consolidation Is a Scam

Debt consolidation is a credible way to pay off your debts but you do want to make sure you do your research when it comes to getting a loan. There are predatory lenders that have popped up and are taking advantage of people who find themselves in a lot of debt.

Top Debt Consolidation Truths

While there are plenty of myths to be aware of, there are also a number of debt consolidation truths you need to know.

You Are Working with a New Lender When You Consolidate

When you get a debt consolidation loan, this usually means you are working with a new lender instead of the lenders where you have current debt. This isn’t a bad or good thing but it means that you need to understand the terms of your new loan and make sure that you know any rules that are unique to the lender. This is why shopping for the right personal loan and debt consolidation is so important so you find one with the right interest rate for your credit and the right terms you can live with. Missing payments is going to make your financial situation worse so you need to make sure you can make the payments.

Debt Consolidation Loans Can Be Secured or Unsecured

Some debt consolidation loans can be secured with collateral that you have. This can be things such as a car, business, or home. Secured loans may have a lower interest rate and can be easier to qualify for. Secured loans also come with greater risk because if you default on the loan then the lender can take the collateral. Not having any collateral can make it harder to qualify for a loan if your credit isn’t good. It may make sense for you to put up some collateral as long as you are aware of the risk.

You Can Use Home Equity Loans and Personal Loans for Debt Consolidation

Personal loans come with a fixed interest rate so they are usually an attractive option. There are many places to shop for online debt consolidation loans. With this type of loan, you get to pay off your debt with the knowledge that payments stay the same. Home equity loans do require your home as collateral. However, the interest rate on the loan can be even lower because you have that collateral. There can be fees for different loans. A home equity loan may have fees for the lender to appraise the value of the home or closing costs for the loan. Personal loans can have an origination fee. Be sure you are learning about any fees first so you can evaluate the total costs and decide if it’s the right choice for you.

Balance Transfers Could Be an Option for Debt Consolidation

A credit card company may want to attract new members by offering good deals on balance transfers. This means you may be invited to transfer your balance from other cards with low or even zero interest. This could be a good choice for consolidating higher-interest credit cards. It’s important to note that a credit card still needs to be paid on time. At the end of the promotional balance transfer period, the interest will become higher, which increases the amount of interest you are going to pay each month. If you do choose this route then you need to pay off as much as possible under the promotional rate in order to take advantage of the offer.

Your Credit Will Influence Your Debt Consolidation Options

As with any type of loan, it’s important to note that a better credit score opens up more options for you. Better credit will give you a better option, along with better terms. If you are looking for debt consolidation assistance then chances are your credit may not be that great. But there are still options for debt consolidation with your bad credit. It will likely cost you more and you may only qualify for a secured loan. If these are your circumstances then you will need to figure out if it’s the best option for you. While you don’t need perfect credit, it does help.

In Conclusion

Debt consolidation can be a good option if you have some trouble with debt but you need to know about debt consolidation truths and myths. Debt consolidation truths and myths have made the process more confusing over the years. Usually, most people with bad credit needing debt consolidation loans. There are a lot of debt consolidation questions but the process doesn’t have to be all that complicated. Once you go through the process, you need to avoid getting in the same situation and in more debt.