Balance transfers aren't the only available option for consolidating credit card debt. For some, consolidating credit card debt into a debt consolidation loan or rolling credit card debt into another loan, such as a home equity loan, home equity line of credit (HELOC), or an unsecured line of credit (ULOC) may be more sensible -- or more feasible, as the best balance transfer offers are usually reserved for people with very good credit scores.
Balance transfers move your debt from credit card to credit card, but in the end it's still credit card debt, and credit card debt is considered unsecured debt. Unsecured debt means that there is nothing held as collateral. Secured debt, on the other hand, basically means that you borrowed money against something. Your mortgage, for example, is secured debt; if you default on your mortgage payments the bank can place a lien against or foreclose on your house. There are pluses and minuses to rolling credit card debt into a secured loan. For example, while you may be able to claim the interest on your home equity loan as a tax deduction, which is a plus, if you have trouble paying the loan, you risk losing your home, which falls squarely in the minuses.
Debt consolidation loans may be a good solution for those looking to consolidate all of their unsecured debt, including credit card debt and store card debt, into one secured loan. Debt consolidation loans usually offer a lower, more manageable monthly payment schedule but they come with a price, literally -- that lower monthly payment is usually a result of a longer payment period, which may mean you'll end up paying more overall.
In the end, no solution is perfect -- within two years of opening a loan as the solution to paying credit card debt, 70 percent of us will find ourselves with the same or more debt [source: McCune]. Alternatively, and if it fits your budget, instead of consolidating credit card debt focus on your payments: Make every payment on time, pay more than the minimum payment if possible, and pay down the card with the highest interest rate first to make the biggest impact.
Author's note: Should I consolidate my credit cards?
The best advice for your individual situation may be one of these solutions or none of them; but if you're considering paring down your credit cards, there are options that may not only help you save money while you pay down those balances but help you avoid bigger financial problems later on (collection agencies, bankruptcy, etc.). And don't forget: Check your credit report once a year.
More Great Links
- Bank of America. "Is debt consolidation right for you?" (Feb. 8, 2013) http://learn.bankofamerica.com/articles/managing-credit/is-debt-consolidation-right-for-you.html
- Cawad, Marilen. "How many credit cards is too many?" MSN Money. 2012. (Feb. 8, 2013) http://money.msn.com/credit-cards/how-many-credit-cards-is-too-many
- CBS News MoneyWatch. "Average credit card debt per borrower inches up." 2012. (Feb. 8, 2013) http://www.cbsnews.com/8301-505145_162-57551876/average-credit-card-debt-per-borrower-inches-up/
- Consumer Financial Protection Bureau. "Why is it important for me to review my credit report?" 2012. (Feb. 8, 2013) http://www.consumerfinance.gov/askcfpb/312/why-is-it-important-for-me-to-review-my-credit-report.html
- Debt.org. "Credit Cards." (Feb. 8, 2013) http://www.debt.org/credit/cards/
- Federal Trade Commission (FTC). "Deter, Detect, Defend." http://www.ftc.gov/bcp/edu/pubs/consumer/idtheft/idt06.pdf
- Karimi, Sabah. "5 Things You Need to Know About Credit Card Balance Transfers." US News & World Report. 2012. (Feb. 8, 2013) http://money.usnews.com/money/blogs/my-money/2012/12/17/5-things-you-need-to-know-about-credit-card-balance-transfersespecially-during-the-holiday-shopping-season
- McCune, Jenny. "Debt consolidation: cure or continued credit problems?" Bankrate.com. 2003. (Feb. 8, 2013) http://www.bankrate.com/brm/news/cc/20031007a1.asp
- myFICO. (Feb. 8, 2013) http://www.myfico.com/
- USA Today - Money. "If used right, credit card balance transfers can save cash." 2011. (Feb. 8, 2013) http://usatoday30.usatoday.com/money/perfi/columnist/block/story/2011-12-26/credit-card-balance-transfer-offers/52234100/1
- Woods, Jennifer. "Debt Consolidation Has Its Pitfalls." CNBC. 2008. (Feb. 8, 2013) http://www.cnbc.com/id/26013413/Debt_Consolidation_Has_Its_Pitfalls