A credit card debt consolidation and a credit card balance transfer are similar but have a few key differences. It’s important to understand what each is before choosing which method to handle your debts. The two differ when it comes to how the debt is settled, as is explained below:
Compiling All Credit Card Debts into One
Taking out a single loan that compiles all of your credit card debts into one repayment plan is referred to as a credit card debt consolidation. Aside from a loan, you could also use a credit card for debt consolidation. This strategy works best for people who have high interest rates on their debts and are struggling to make the payments each month.
Something important to remember about debt consolidation is the loan or credit card you choose to use for consolidation should have a lower interest rate than your current rates. A higher interest rate could cause you to pay more money in the long-run. Credit card debt consolidation is appealing to many people because it simplifies paying off their debts into one payment, which is easier to keep track of than three or more.
Moving a Credit Card Balance from One Card onto Another
A credit card balance transfer, in contrast, involves moving a credit card balance from one card onto another. You have not compiled all of your debts into one. The debt has been transferred to another card. Situations in which you would want to opt for a credit card balance transfer are when you qualify for a credit card with a lower interest rate, in order to save money on repaying the debt. Lower interest rates can let you breathe a bit easier.
If you choose to do a credit card balance transfer, search for credit cards that offer a 0% promotional rate for even more savings. A credit card that provides a 0% promotional interest rate doesn’t charge any interest for 6-12 months, allowing you to decrease your debt tremendously before being hit by an interest rate each month again.
What You Need to Know about Debt Consolidation and Credit Card Balance Transfers
Transferring a credit card debt onto a 0% interest rate card isn’t free. You are typically charged 3% of the transferred balance. Factor this into your calculations as you contemplate which method is best for your situation. The second thing to be aware of is many companies will cancel your plan if you make even just one late payment during the 0% promotional period.
Thirdly, to qualify for a 0% introductory rate credit card, you must have very good credit. You’ll have to shop around for the lowest interest rate you qualify for based on your credit score. Lastly, you should avoid using a cleared up card again after it has been cleared through a balance transfer. You don’t want to risk accumulating more debt.
Credit card debt consolidation and credit card balance transfers are great ways of reducing how much debt you must clear and lowering your interest rate on that debt. One isn’t necessarily better than the other. What determines which is right for your situation depends on your circumstances, credit score, and amount of debt you have. A debt consolidation compiles all of your debts into one with one interest rate, and a balance transfer simply moves your credit card balance from one card onto another.