If you are carrying a high balance on one or more credit card accounts, you may be exploring your financial options. It can be difficult to pay a high credit card balance off because of the combination of a high interest rate and a revolving loan term. As you research the options, you will likely come across a credit card balance transfer and a credit card debt consolidation as viable solutions for dealing with your debt. While these two terms sound seemingly the same, they are actually very different. With a closer look at what these terms mean, you will be able to make a wise financial decision.
What Is a Credit Card Balance Transfer?
With a credit card balance transfer, you are transferring debt from one or multiple credit cards to a single credit card account. In many cases, a credit card balance transfer is done because the receiving credit card has a great promotion on balance transfers. For example, balance transfers may receive a low interest rate or may have no balance transfer fees. In some instances, the balance transfer rate may be as low as zero percent for a short period of time. This gives you the opportunity to potentially save hundreds of dollars or more interest during the promotional time period. However, the rate often rises substantially after the promotional period ends.
What Is Debt Consolidation?
A debt consolidation involves transferring credit card debt to a single credit card or a personal loan. More commonly, a personal loan is used because it has the benefit of a fixed term and a low fixed interest rate. Many people who pursue debt consolidation will apply for an unsecured personal loan or even a home equity loan through a bank. Because the interest rate is low and the term is fixed, you generally will have significantly lower monthly payments until the debt is paid off. At the end of the fixed term period, the debt will be entirely eliminated.
How Should You Use These Options?
If you are comparing the two options, it is important to consider two things. First, think about how much of your debt you can reasonably pay off during the introductory period for your credit card balance transfer option. Second, consider if you will qualify for a debt consolidation loan through a bank. This option requires you to have a good credit score in most cases, so it is not suitable for everyone. A great middle ground between both options may be to use the special offer on a credit card balance transfer. Right before the special period expires, you can transfer the debt to a personal loan with a fixed term. This gives you the ability to take advantage of both options.
Managing debt responsibly is important. While you are trying to pay down and ultimately eliminate your credit card debt, take steps to avoid making additional charges to your accounts. By doing so, you may eventually reach a point of being debt-free.