Debt is a scary thing. If your spending gets out of control and you can no longer pay the full statement balance by the due date you start to accumulate interest, and then every month a large portion of your payment will go towards interest (could be upwards of 16%) and you will notice as the balance goes up, you will find the principal balance will hardly chip away, especially if you’re only making the minimum payment. Depending on the balances and the number of cards that you are paying on, you could find your financial freedom start to slip away and it could make sense to either take out a debt consolidation loan, or apply for a new credit card that you can pay off the balances during the promo rate, to really start to chip away at the balance.
One thing that consolidating your debt will not do, and what you have to do for yourself, if change your spending behavior. What you are doing now is essentially opening up more credit with the balances transfer over to the new card/loan, leaving the existing cards with a zero balance. If you follow your old behaviors, you may be tempted to go on a spending spree, but do yourself a favor and cut those cards up, leave them open, but do not get back into your old debt habits again.
One Manageable Payment
The thing that is nice about consolidating your debt is that you now have not only one management payment, but also one due date. You can now budget your finances to ensure that you have the funds to auto-deduct this payment every month if it’s a loan, or set to deduct a certain amount for a credit card, which would be smart to divide the balance by the promo months (say 0% interest for 18 months) to clear the balance before interest begins to start, depending on the balance. Because this payment is lower, the focus should really be on saving.
Lower Interest Rate
Credit cards can have sky high interest rates outside of any promo rates, so it’s a good idea to strive for the lowest interest rate card you can. All cards offer the “best” interest rate, subject to credit approval, so it’s a good idea to continue to check your credit score (now listed in your monthly credit card statements) so you know exactly where you stand, and if your credit is in line, do not accept anything else but the best interest rate, after all, there’s so much card competition out there that every % less equals money saved.
Balance Transfer Fees
Transferring balances over to a new card can make a lot of financial sense, especially if there is a promo rate that is significantly less than the interest rate that you are paying now, but there’s one thing to read in the fine print, and that is what it costs to transfer the balance. You could get a 0% APR promo for a year, but it could cost you 5% of the balance to transfer, or a higher APR but a lower balance transfer fee. You have to weigh the current balance vs. what you’d pay in interest (if the balance is $10,000 you could pay $500 (5%), or $300 (3%).
Credit Hit in the Short Term
Taking out this new loan or credit card to being to consolidate your balance will give you a credit hit for the inquiry, so it could lower your score in the short term, so don’t be alarmed, when you pay off the existing accounts and begin paying on the new account you will start to see scores rise, provide you leave the existing accounts open and your score is not lowered even further by closing and reducing that available credit to you, so you might, again, want to cut up those cards and just not use them.
Could Be Paying More Long Term
If you are deep into debt, you may just want to get payments into a manageable one so it frees up extra money each month, so maybe the long term isn’t important as much, but something to think about, since you are lowering the payment but spreading out over more years, you could end up paying thousands more in interest over time because you are making interest payments for years after you would have now, but that may be a small (well rather large) price to pay to have a lower payment now to get finances under control.