A man paying off credit card debt

Debt Consolidation Or Debt Transfer

Both debt consolidation and debt transfers are effective tools that you can use to reduce your credit card debt. But, how do you decide which method is right for you? Take a look at a few reasons why you might want to use one method over another and then some other debt reduction alternatives.

Debt Consolidation

A debt consolidation loan is a valuable tool that you can use to finally get out of credit card debt. It involves simply taking out a personal loan that you can then use to pay off those high interest credit cards.

If the borrower has good to excellent credit, they should be able to secure a loan that is in the single digits, interest wise. Since most credit cards are around 20 percent interest, you can easily see where the savings will come from. Paying less than half of the typical interest will allow you to put more money towards the principal and reduce your debt at an accelerated rate.

When To Choose Debt Consolidation

If your credit card balances are into the thousands, debt consolidation will likely be a good option. These balances will probably be over multiple cards and your loan will allow you to combine them into one easy to manage account. Making one payment a month will make managing your bills less time consuming.

Should you have good credit, you get another perk, low interest rates. With good to excellent credit, rates in the 6 to 7 percent range should be attainable, even if the loan is unsecured. This could be as little as a third of the interest that you are currently paying. That means that if you have $5000 in debt, you will save around $50 a month in interest. This is money that you can divert towards principal, allowing you to pay off debt much faster.

When Not To Choose Debt Consolidation

Consolidating your debt is not always a good thing.

One reason that you might not want to consolidate is if your credit rating is poor. Having a low credit score would mean that the interest rate on your loan could approach what you are already paying the credit card companies. With loan origination fees, your APR could even exceed what you are paying.

Another reason you might not go this path would be if you have a low level of debt. If you have only one or two thousand dollars in debt, it might not be worth the hassle of consolidation.

Debt Transfers

Doing a debt transfer would involve transferring your debt to a low or even zero percent interest credit card. Simply use your good to excellent credit and apply for a new credit card that offers, ideally, a zero interest introductory rate. These rates are generally good for at least 6 months and up to one full year.

Once you have your credit card, transfer your balance over and start using your interest savings to pay down your principal. If you do not pay off your debt before interest is scheduled to start, just apply for another card and start the process all over again.

When To Choose A Debt Transfer

For those of you with excellent credit, choosing this method is an easy decision. No interest always beats paying interest, even if it is the reduced interest from a debt consolidation loan. Once your debt has been transferred, you can use all of that wasted money to get out of debt.

When Not To Choose A Debt Transfer

The main reason not to choose to transfer debt is if your credit does not qualify you for a low rate. Why transfer your debt to a card with the same interest rate? Even a slight interest reduction might not be worth the trouble.

Additionally, if your debt is too high, transferring might not be a convenient option. If you have 10,000 dollars in debt, for example, it would be hard to find a card with a limit that high. You would need to have excellent credit and even then, you would have to spread your debt over multiple cards. In this case, consolidation would probably be a better choice.

Other Debt Reduction Methods

So, what if you do not or can not use wither of the methods above? How do you get rid of that credit card debt? Well, you should turn to one of the time tested debt reduction methods. Take a look.

Debt Snowball Method

We talk about this method all of the time, as it is one of the most popular debt reduction plans. If you are the type that needs immediate gratification, this is the choice for you.

With this method, you simply organize all of your credit cards by their balance. You then pay the minimum payment on every card except the one with the lowest balance. On this card, you pay as much as you can every month.

The idea is that since you are paying on the card with the lowest balance first, you will have a paid off card quicker. That will give you the motivation to continue on with your debt reduction.

Debt Avalanche Method

If you want to make the most of every dollar, this is the method you should consider.

With this method, you will once again organize your credit cards, but not by amount. Instead, you will organize them by interest rate. Then, pay the minimum payments on all cards except for the one with the highest rate. On this account, pay as much as you can each month.

The benefit to this method is that you pay off the highest interest debt first. This will make the most of every dollar that you put towards your debt and should help you eliminate it faster.

Debt Snowflake Method

What do you do if you want to pay off your debt, but you just do not have any extra money in your budget? You turn to the Debt Snowflake method.

With this method, you continue to pay your credit cards as normal. Then, whenever you come into any extra money, you use this money to pay down your debt. It could be anything from a five dollar bill that you find on the street to an unexpectedly large tax return of several hundred dollars. Use any extra money that you come into for debt elimination.

The benefit to the Snowflake method is that you do not have to fit extra debt payments into your budget. You just use “found money” that you were not expecting.

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James Car is a finance, loan and budget expert based in the United States. After attending Brookhaven college, he went on to become a successful entrepreneur. He now enjoys writing articles that help people save and make the most of their money.