Balance transfers: best way to consolidate credit card debt?

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You have credit card debt. You want to pay it off. You’ve seen cards advertising 0% APR on balance transfers for a year, or fifteen months. You wonder if it’s the right choice for you and your debt.First, let’s go over what, exactly, a balance transfer is. A balance transfer is basically using one credit card to pay off another credit card. Of course, you’re not really paying off the debt – it just gets transferred to a different card, ideally with better interest rates. You can do a balance transfer with just one card or you can use a balance transfer to consolidate debt from multiple credit cards onto one card.Some credit card companies offer cards with promotional APRs for balance transfers. Typically, this means they won’t charge you any interest for anywhere between six and eighteen months. Some may also waive the balance transfer fee, though this is less typical.Besides saving you money on interest, balance transfer promotions also mean that 100% of your monthly payment is going towards paying down debt.

There are three big questions you need to ask yourself before you perform a balance transfer:

  1. How much credit card debt do I have across all of my cards?

  2. How much money can I put aside each month to pay down that debt?

  3. How long does the promotional APR last?

These questions are a formula to help you figure out whether or you’d be able to pay off your debt within the promotional period.Take this example:

  1. Marsha has $4,000 in credit card debt spread across three cards.

  2. She can put aside $200 every month to pay that down.

  3. She qualifies for a twelve months promotional APR on balance transfers.

Without taking interest into account, it would take Marsha twenty months to pay down that debt. However, the promo APR won’t last all twenty months, meaning that Marsha would be charged interest on some of her debt.Should Marsha do the balance transfer? In this case, we’d say yes – if someone can commit to pay off their credit card debt in around two years, that’s good.

When shouldn't you do a balance transfer?

There are two major reasons you might not want to do a balance transfer. One is simple, and one has huge lifestyle implications.Let’s start with the simple reason. Balance transfers typically have a one-time fee associated with them. The fee is small – usually around 3% – but depending on how much debt you want to consolidate and how many credit card balances you’re transferring, this fee can make a huge impact on how much you’re ultimately paying off. Some may also object to paying a fee at all – after all, the whole reason behind this is get rid of debt, not add to it.The other big reason you shouldn’t do a balance transfer is that it may not help you make the behavioral changes necessary to stay out of the debt. Paying down debt and staying out of debt requires a commitment to your budget – in short, only buying what you actually have money right now.

This isn’t an easy commitment to make, especially to people who have been living in debt for years, and often, a balance transfer can make it worse. How? Well, all of a sudden, all of those credit cards have fresh and crispy balances of $0.00. For many people, this proves too tempting, and they fall back into the cycle of using credit cards to live beyond their means.But this isn’t just a weakness of balance transfers – pretty much any debt consolidation strategy won’t work unless you make a commitment to change your behavior, which requires a comprehensive payoff plan and the creation of a budget.

Before making your decision, understand your behavior

Did you get into debt because of one giant emergency that you couldn’t afford, or did it happen more slowly, built-up through years of making purchases beyond what you could afford?The difference can have a huge impact on your strategy for paying down debt.If your debt is relatively small – say, from one big emergency, or a short period of un- or underemployment, or a move across country – you probably don’t need help changing your habits. You can use the three questions above to figure out which balance transfer option is best for you, or get a small personal loan at cheaper interest rates.However, if you’re in severe debt from multiple sources, a balance transfer is just kicking the can down the road, and opening up a few new roads to get yourself into more trouble.

Finding a credit counselor

If you’re in severe debt, you should speak to a credit counselor. Credit counselors can help with a number of financial problems, from debt management to student loan counseling to general financial education. Your credit counselor can help you go over your debt situation and figure out not only the best way to get out of debt, but to change your behavior so you stay out of debt.Credit counselors can also set up debt management plans, or DMPs. With a debt management plan, you give your credit counselor a set payment every month that they then use to intelligently pay off your debts in a way that’s both effective and will save you money.Not all credit counselors are there to be helpful – some charge predatory fees for their advice and services. While most good credit counselors are non-profit organizations, non-profit status does not make a credit counselor trustworthy.According to the FTC, trustworthy credit counseling agencies should "send you free information about itself and the services it provides" without requiring you to give up personal details about your financial situation. You can check to see if there are any complaints against an agency at your state’s Attorney General’s office or a local consumer protection agency.

Is a personal loan a better way to consolidate credit card debt?

Using a personal loan to consolidate credit card debt comes with a lot of same problems as using a balance transfer – if you’re not changing the underlying behavior, you’re just kicking the can down the road and creating more opportunities to get into trouble.If you’re committed to changing your financial behavior, however, a personal loan can be a good part of a larger financial plan, especially if you have large debts with high interest rates. You can get personal loans from banks, credit unions, and online companies. While online companies typically have more competitive rates, you may want to try your local bank or credit union first – a lot of people benefit from discussing a loan in person.

Further resources

-> 6 steps to pay off your debt-> 3 ways to fix a broken budget-> Budgeting 101: your basic needs

Image: Alex Proimos