Debt Consolidation Loan or Transfer Your Balances?

Taking a debt consolidation loan is an alternative to consider instead of simply transferring your balances to a new card if you would prefer to settle your debt down. Both measures are not advantageous to your credit score, but both do offer attractive options to simplify your finances and provide for less expensive loans over time through reduced interest rates. Neither option is the correct one across the board. Each individual situation lends itself to a different answer, but a process can be used to determine which is better in your case.

Step 1: Prioritize Your Debt

The first step to take is prioritizing your debt in order of interest rate. Take a look at all of your debt including auto loans, mortgage loans, personal loans, student loans and credit card debt. If you have multiple credit cards, lay these out in terms of interest rate as well. You should only consolidate or transfer balances if you can get a lower interest rate elsewhere. Once you have a picture of your interest rates, factor out how much each individual piece of debt will cost you over time to pay off - be sure to count interest rate.

Step 2: Talk to a Consolidation Company

Speak with a consolidation company for a primary evaluation. Ask what they can offer you in terms of debt settlement with your existing lenders. Without divulging too much information, discuss average interest rates based on an estimated personal credit score. Next, do the math with this option. Determine how much the new loan will cost you and how much it will save you on your existing debt. If this loan will save you more than 10% of the funds you owe, it may be a good idea. Otherwise, it is not worth the negative mark on your credit score to modify your existing debt. 

Step 3: Shop for Low Rate Credit Cards

Speak with your bank and a few credit card companies about low rate credit cards. Some cards may offer incentives to transferring balances, and you should ask about these incentives. Remember: closing credit cards and transferring balances is also a negative mark on your credit. Only pursue this option if you can save more than 10% on your existing debt. The credit card companies will not offer to settle any debt on your behalf. They will also likely have adjustable rates. 

Step 4: Factor Benefits over Time

Compare the two options and your anticipated savings. Both will offer you a one-monthly payment option incentive. Both will be negative marks against your credit. Compare on the other factors, specifically in terms of any settlement opportunities you may have through a consolidation loan. If either is offering a fixed, low interest rate, this is attractive in order to prevent your monthly payments from going up over time. When you weigh these benefits, you will likely find a consolidation loan is cheaper than using a credit card. However, the situation differs for each person. Finding the right credit card offer can swing your decision the other way.


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