Debt Consolidation Vs. Balance Transfer Cards: Which Is Best?


When I was in my early 20s, I made a huge money mistake. A mistake so big that it led to several years of struggling with debt. A mistake that started off innocently enough but spiraled into larger and larger consequences due to the lack of foresight necessary to right the course.

So what was this huge mistake?

I ignored my financial instincts.

Now, I’m not against taking good financial advice. How could I be? I dispense it nearly every day. But I am against taking advice blindly. I am against not considering the source and not adjusting the advice to your own priorities. That’s when things can get dangerous. And that’s what led me to years of credit card debt.

My Big Debt Consolidation Mistake

At 24 years old I had $2,000 of credit card debt that I was struggling to pay off. Ironically enough, I was a personal banker at the time. I told a close friend (and personal banking colleague) that I wanted to take out an unsecured loan to pay it off. The loan would lock in a lower interest rate and give me a fixed payoff plan. It was just what I needed to both pay less for the debt and know for sure when exactly it would be paid off.

My friend then reminded me that I could take out a 0% interest rate balance transfer credit card. With that I would pay no interest at all the first year – the obviously cheaper choice. However, I was worried about it for one big reason: it required me to take on a new credit card.

I didn’t want a new credit card. Heck, I wanted to forget I ever even got one in the first place! And I certainly didn’t want to deal with any more revolving debt. I wanted a fixed rate and fixed payoff date. Revolving debt scared me – I wanted structure. And there’s a reason I wanted structure. I didn’t trust that I could pay it off in time and I didn’t trust myself with such easy access to credit. In the end, however, I took my friend’s advice…

….and ended up in debt for several more years.

Debt Consolidation vs. Balance Transfer Credit Cards

The problem with my choice wasn’t the credit card itself. The problem with my choice was it didn’t align with my priorities. I knew my strengths and weaknesses but I ignored them to take blanket advice. That’s what hurt me in the end.

When it comes to debt consolidation, there are a variety of options to help and they can all be good and bad in varying degrees. What’s important is understanding yourself and what will work best for you. Let’s take a look at the two choices:

Debt Consolidation
Debt consolidation often comes in the form of a loan, whether secured or unsecured. An unsecured loan is now most commonly acquired through peer to peer lenders such as Lending Club and Prosper. A secured loan can come from something like a home equity loan.

So why take out new credit in the form of a loan to pay off debt?

  • Lower interest rate
  • Fixed payoff period
  • A chance to break away from credit cards

Risks: You’ll likely pay higher interest rates than you would for a balance transfer credit card. There’s also no guarantee you won’t start using your old credit card again and go back into debt.

Balance Transfer Credit Cards
Balance transfer credit cards are credit cards that are used specifically to consolidate high interest rate debt. Basically you open a new credit card that offers a 0% interest rate for a set amount of time and use the credit to pay off the other credit card. Then you work to pay that card off before the interest rate goes up.

So why take out a balance transfer credit card?

  • Little to no interest is charged for the introductory period (saving you money and allowing more of your payments to go to the principal balance)

Risks: Without the structure a loan has, you may not necessarily pay the card off before the interest rate increases (like what happened to me) and you can even get charged retroactively for the remaining balance (also like what happened to me).There’s also no guarantee you won’t start using your old credit card again and go back into debt.

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Which One is Better?

You probably already know where I’m going to go with this. To know whether debt consolidation or a balance transfer credit card is better is to know what your priorities are. Are you looking to spend the least amount of interest possible, thus shortening your payoff plan as much as possible? If that’s your top priority, the balance transfer credit card could be the tool for you. Do you fear revolving credit and/or worry you won’t create (or stick to) a self-regulated payoff plan? If so, then a debt consolidation loan may be your best option.

In my own situation, I discovered another interesting fact – your answer to this question will change as your life and priorities change. When I first had credit card debt, paying it off via a loan would have made perfect sense for me. That’s because my top priority was to have a strict payoff plan enforced by someone other than myself. But years later, I actually paid off my credit card debt with a balance transfer credit card. By then, I’d gotten much better at sticking to a plan and really wanted to just pay the debt off as fast as possible.

Now it’s your turn. What are your top priorities right now and which option seems to work best with your lifestyle, your strengths, and your weaknesses? No matter how you look at it, if you’re dealing with high interest rate credit card debt, then either of these choices can help you tremendously (as long as you’re approved for a lower rate than you’re paying now). Just don’t make the same mistake I did. Do your research, ask for advice even, but listen to your gut. Then create a debt payoff plan that works for you.

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