American credit card debt continues to grow. In fact, according to NerdWallet’s household credit card survey, debt load has increased by more than 5% since last year. The average revolving credit card balance is nearly $15,500 per household with $6,658 of interest paid each year.
The increase in credit card debt is reflective of higher consumer confidence, increasing household income, and medical bills charged on plastic. Unfortunately, many families end up finding themselves in a financial tailspin – a cycle of interest piling on top of ever-increasing balances.
When the time comes to find a better way to tackle credit card debt, two approaches often rise to the top – credit cards offering 0% balance transfers and debt consolidation loans. Texas, well above the national average in credit card debt, can benefit from either approach. We have put together this review to clarify how each tactic works and which approach may be best for you.
You may be eager to jump in feet first and sign up for a 0% credit card balance or debt consolidation loan. However, before you make that leap, it is important to understand the basic mechanics of each first.
Credit Card Balance Transfer
Balances on current credit cards are rolled over to a new or different credit card offering 0% annual percentage rate (APR). The 0% APR is offered for a limited time. A fee is usually charged against the entire transfer of 3% to 5%.
Debt Consolidation Loan
Balances on current credit cards or other debt obligations are paid off using a loan. The loan will charge interest on your balance; however, repayment terms can stretch out for multiple years, reducing your monthly expenditure in exchange for a single payment.
Both debt management techniques will not immediately reduce your debt. It is also important to note that opening a new credit card for a balance transfer or acquiring a debt consolidation loan may negatively affect your credit score.
Debts Allowed to Transfer
Debt comes in a variety of forms. However, not all debt can be transferred to a credit card or paid off by a debt consolidation loan. In general, it is okay to transfer the following to either:
- Credit card
- Electric bill
- Medical bill
- Student loan
- Income taxes
- Personal loan
- Water/Sewer bill
- Phone/Internet bill
- Retail store credit card
- Other person’s credit card
- Automobile loan (requires pre-approval)
The following debts cannot be transferred to either a credit card or debt consolidation loan:
- RV loan
- Boat loan
- Government loan
- Home equity line
- Home equity loan
- Lawsuit settlement
- Back taxes and fees
If you are having difficulty paying any outstanding balance, the first step is to contact the holder of the debt. Sometimes companies and institutions will work with you if you find yourself in a pinch.
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Comparing the Pros and Cons
Now that we know what credit card balance transfers and debt consolidation loans are, it is time to dig into the details of each. The right approach will depend heavily on your particular situation. We have broken key aspects of each tactic to help you make the best decision.
The last thing anyone wants to do is have to spend more money. However, with either approach, you may actually have to pay money to save money. Although credit cards are offering 0% interest, to obtain the great rate will mean paying 3% – 5% of the amount you want to transfer. This is usually okay as the one-time payment will be less than the interest you would have paid otherwise. Debt consolidation loans may have a flat application or origination fee of a couple hundred dollars, although not all consolidation companies charge a fee at all.
Installment Time Frame
The 0% interest rate available on a credit card balance transfer may sound fantastic. It is until the introductory offer expires, usually between 6 and 18 months after the transfer. After the introductory period expires, the remaining balance will be subject to the card’s likely high interest rate of over 20%. Debt consolidation loans, while charging interest from day one, can provide repayment terms lasting years, eliminating the worry of being hit with an exceptionally high interest rate in a few short months.
Even the best-laid plans can hit a speed bump. With a credit card balance transfer, missing a monthly payment will trigger not only a late fee, but instant expiration of the 0% APR. This means your newly transferred balance will again be subjected to high interest rates. Debt consolidation loans may charge a late payment fee, but your interest rate will remain the same.
Qualifying for Credit
Qualifying for a 0% balance transfer credit card still requires approval. Applying for multiple credit cards will also appear on your credit report and affect future applications for credit or loans. Debt consolidation loans usually have a more personalized approach and offer terms to individuals who may be declined for a new credit card.
Neither credit cards nor debt consolidation loans will have a pre-payment penalty. This means that if you have the ability to off an outstanding balance, go for it.
Choosing the Right Approach
It is easy to dwell on the circumstances and decisions of the past that lead to your debt situation. However, it is essential to learn from them and begin moving in the right financial direction. For most, this means changing your habits surrounding money.
A zero interest balance transfer or debt consolidation loan may indeed hold the keys to a debt-free life. But, if your spending and saving habits do not change, neither will prove to be a long-term solution. A debt-free life requires a commitment to actively managing your finances – including setting up a budget.
Finances can be intimidating. For many, the solution was to work together with a debt counselor. Debt counseling services can evaluate all your options and help you select the right ones that will reach your debt-free goals the fastest. If you are unsure of what your next financial step should be, consider reaching out to a credible debt counseling services. After all, the most important step is the first step.