- 3 min read
- Learn when it makes sense to use a credit card to consolidate debt.
- Examine what to watch out for, when making a balance transfer.
- If you can't consolidate with a transfer, look for alternate debt solutions.
Is a Balance Transfer a Good Way to Solve a Debt Problem?
Carrying a lot of credit card debt is dangerous. It's hard to keep your finances stable. If you are walking a financial tightrope, one possible solution is to do a balance transfer, using a credit card to consolidate debt.
A balance transfer moves your high interest debt from one or more cards onto one, new card with a low interest rate. This way, you can save money by paying off your principal balances faster. A few years ago, 0% balance transfer offers were very common. While their are fewer 0% offers available, some do exist. The best consolidate debt credit card offers can save you money, if you have the ability to pay more than the minimum monthly payments.
Best Credit Cards to Consolidate Debt
In order to find the best balance transfer offer, you need to shop around. The best places to look are with major, national banks, who market balance transfer offers in order to build their client base. As of early 2012, you can get a low interest credit card to consolidate debt with Citibank, Chase, and Discover. Their offers for a 0% transfer make them among the best credit cards to consolidate debt. You can also see if a local credit union can help you.
When using a balance transfer offer from a credit card to consolidate debt, it is very important for you to pay attention to the:
- Initial Interest Rate- Your low rate, the one that is used to lure you to apply for the credit card to consolidate debt, is commonly called the "teaser rate." Look for as low an introductory rate as possible, but the lowest rate is not your only consideration.
- Initial Rate Period- Some teaser rates are good for six months, before a new, higher interest rate kicks in. Other cards offer a teaser period of as long as 18 months. It is better to get a teaser rate of 1.99% that lasts 18 months, than a 0% rate that lasts for six months.
- Interest Rate Adjustment- Once the teaser rate expires, your rate increases. It is your responsibility to know how high your rate will be, once it adjusts.
- Fee You Pay- Standard balance transfer fees are 3% of the balance you transfer. For example if you transfer debts of $5,000, $3,000, and $2,000 onto a new card, you will pay $300, 3% of the $10,000 you transferred. It only makes sense to pay $300, if you are going to save more than $300 in reduced interest costs during the time your low interest rates is in effect.
- Interest Rates on Purchases- Your teaser rate may only apply to the balances you transfer. Purchases may be charged at a different, much higher interest rate. Read the fine print.
The biggest drawback to a balance transfers are:
- Limited Availability- You need excellent credit in order to qualify for a balance transfer.
- Penalty Rate- If you ever miss a payment, your low interest rate disappears, replaced by rates as high as 29.99% or above.
- Large Payments- Using a credit card to consolidate debt is ideal if you are able to pay down your principal balances aggressively, during the low-interest teaser period. If you are only able to make minimum payments, you won't make enough progress during the months of low interest to solve your debt problems
Balance Transfers Alternatives
If you won't qualify for a balance transfer or are only able to make your monthly minimum payments and no more, look at other solutions to resolve your debt problems. Credit counseling and debt settlement are both options that can help you save money and get out of debt faster. Neither of them require you to have strong credit to qualify for help. You can read about them and other debt relief options, here at Bills.com, so you find the best solution for your individual needs.
The Bills.com Debt Coach is a free tool that helps you find the way to pay off your debt. By analyzing your individual situation and the goals you specify, Debt Coach recommends one of five proven strategies for becoming debt free. Try it today.
Struggling with debt?
If you are struggling with debt, you are not alone. According to the NY Federal Reserve total household debt as of Quarter Q2 2022 was $16.15 trillion. Student loan debt was $1.59 trillion and credit card debt was $0.89 trillion.
According to data gathered by Urban.org from a sample of credit reports, about 26% of people in the US have some kind of debt in collections. The median debt in collections is $1.739. Student loans and auto loans are common types of debt. Of people holding student debt, approximately 10% had student loans in collections. The national Auto/Retail debt delinquency rate was 4%.
Each state has its rate of delinquency and share of debts in collections. For example, in Wisconsin credit card delinquency rate was 2%, and the median credit card debt was $371.
Avoiding collections isn’t always possible. A sudden loss of employment, death in the family, or sickness can lead to financial hardship. Fortunately, there are many ways to deal with debt including an aggressive payment plan, debt consolidation loan, or a negotiated settlement.