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2 ways to slay your debt dragon and a bonus DIY plan

Erica Sandberg

November 10, 2015

QHi Erica,

I am trying to decide if I should take out a debt consolidation loan to pay off my credit card debt or get another credit card that has 0 percent APR for a period of time. I got approved for a debt consolidation loan at 11.95 percent, but that's not much lower than my credit card's APR. What are some of the pros and cons of each method? — Marie

ADear Marie,

There are many differences between a debt consolidation loan and a balance transfer. Both have merits as well as a few drawbacks. Here are the basics of each, with upsides and downsides:

Consolidation loans

Banks are often happy to take on debt that's owned by other creditors. After all, it's one of the ways these financial institutions turn a profit. In exchange for lending you the cash they earn the associated fees. But how do you decide when to consolidate debt?Ask Erica


  • One payment: This is nice because it allows you to streamline your money management system.
  • Fewer fees. If the rate is lower than what you're being charged now — which it is, in your case, albeit not that much — you  will save money.
  • Closed terms: Because it's a loan, you're forced to send fixed payments every month until the debt is paid off within a specific time frame. If you need strict parameters, this is the product for you.
  • Adding to your credit mix: Your FICO score may benefit from adding a different type of loan to your credit history.


  • Good credit is required: A bank won't offer favorable interest rates if your credit rating is shot. The rate you quote is OK, but you may be able to do better if your FICO score is higher.
  • Locked in: Maybe you would prefer the flexibility of a credit card, which lets you vary the payment amount every month. In that case, a loan is not a good idea.

Balance transfer

Like consolidation loans, card companies may be eager to pay off balances you hold with other creditors. The advantage to the issuer is that the card company will  gain another customer. The issuer may offer low or no interest on the debt you hand over for a while, but if you don't pay the balance off in the promotional time frame, interest will begin on the remainder.


  • Savings galore! Seriously, if the issuer is offering 0 percent APR for a long enough time for you to achieve debt-free status, you can put more money in your wallet and walk away a winner.
  • Another card to use: After you're in the black, you'll have a fresh card ready to go. If the credit card has a decent APR and rewards program, you can start to charge again and earn valuable points.


  • Balance transfer fee: It wouldn't be prudent to pay off a person's debt for free, would it? Nope. That's why most issuers charge an initial fee, usually of about 3 percent of the balance. A $5,000 balance, for example would cost you $150 right off the bat, which is often just added to the balance.
  • Low rates can disappear early: One late payment can trigger a nullification of the super great deal. Then that low rate will be hiked to whatever was outlined in the agreement — which could be much higher that what you have now.
  • May not solve underlying issues: I can't tell you how many people dance around with their balances from one issuer to the next, but then charge up the original accounts again. Soon they end up with a slew of maxed-out cards. If you're borrowing to make ends meet, don't add more plastic to your life.

Consolidating debt can help you defeat it. Which of these options sounds best? Before deciding, remember that you can also appeal to your current card company and request a reduced rate. It may consent. Even if it doesn't, you can create a personal plan to get out of debt fast:

  • Determine how much you have to send all of your creditors, and never go below that amount.
  • Send the most to the account with the highest interest rate and the minimum to the rest.

The only downside to this system is that it takes a little more time and effort!

Got a question for Erica? Send her an email.

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