The Debt Consolidation, Balance Transfer Debate |

What’s the wiser choice, debt consolidation or transferring your large credit card balances to a new cards with lower interest rates? Not surprisingly with such a big question, the answer is a solid “It depends.” Before deciding on either course, consumers need to take a long look at their finances, the amount of debt they owe and their past money management behaviors. Only by considering all of these factors will consumers make the right decision when it comes to debt consolidation versus the credit card shuffle.

Pros and Cons

There are several pros and cons with each method of dealing with a large amount of debt. When you transfer credit card balances from one card to another, you do get the benefit of transforming your high-interest debt to debt of the low-interest variety. This means that you’ll spend less money each month paying it off. There’s a downside here, though, too. First, the obvious one: Consumers who transfer their debt from one credit card to another often continue to rack up even more debt after the move. They then have to search for another low-interest credit card to begin the process all over again. Consumers who do this are not addressing their debt problems. Also, as credit card debt continues to rise, consumers’ three-digit credit scores will fall. They will then struggle to qualify for mortgage, auto and other loans that don’t come with exorbitant interest rates.

The Debt Consolidation Alternative

Taking out a debt consolidation loan comes with its own set of pros and cons. A debt consolidation loan takes all your debt and, as the name suggests, consolidates it one loan. You then make one monthly payment until this debt is paid off. While doing this, you’ll no longer receive the harassing phone calls from collection agencies. The benefit of debt consolidation is obvious: You’ll be dealing with your debt, reducing it steadily and at a pace that you can afford. Debt consolidation loans can provide you with peace of mind as you whack away at your debt. Unfortunately, there are some negatives, too. Debt consolidation loans often come with high interest rates. They, too, will cause your credit scores to fall.

The Important Factors

The biggest factor in your decision should be the size of your outstanding debt. If you owe less than $10,000 in credit card debt, you can probably pay it down yourself if you are disciplined enough. Simply transfer the debt to a card that features low or no interest for a period of time. Then set up a budget designed to erase that debt over time. If you owe a significantly higher amount, though, a debt consolidation loan might be your best option.