Editorial Policy

Consolidate debts or pay them down separately?

Erica Sandberg

September 27, 2013

QDear Erica,

I have been looking for a card that doesn't have a balance transfer fee. So far, I haven't been successful. I also wonder if it's best to consolidate bills or continue to pay them separately. I am afraid if I consolidate my bills, the no-interest period would end before I have paid them off. I believe I have a better chance of staying within the no-interest period by not consolidating them. One thing's for sure, after I pay off three credit cards, I will only keep one, and it's doubtful if I would keep one at all.  — Carolyn

ADear Carolyn,

It is true that the majority of credit card issuers do charge a fee, often 3 percent, to take on a debt incurred with another creditor. A few don't, though. For example, with a quick search on the Balance Transfer section of this site, I see that the Chase Slate card offers some rather spectacular terms: not a penny in transfer fees and 0 percent APR on both balance transfers and purchases made within the first 15 months. American Express and Capital One have some compelling balance transfer products too. Ask Erica

Before applying for another card, however, look to the accounts that you already own. If you have plenty of room on an existing card (owing less than 30 percent of your credit line is ideal for scoring purposes) and the APR is fair, ask if you may add your other debts to it, and what the cost might be. If it's reasonable, you can avoid having to try for another line of credit.

Nothing? Then sure, explore new account options and make a balance transfer. Even if it comes with a transfer fee, you can come out ahead financially when the introductory rate is low (or nil) and you pay in full before it expires. The worst that can happen if you don't delete the debt by that date is that interest will begin to accrue on what remains. Therefore, also seek a card that has a decent post-promotional APR.

To know if you'd save more money by paying the accounts individually or with a consolidation, plug your data into this balance transfer calculator. In a moment you'll find out.

The best way to get out of debt — with a balance transfer or not — is to determine a fixed monthly payment, and never pay less than that sum. If you're paying multiple accounts, route the most money to the one with the highest APR first, and then work your way down. Do not charge any more while you're deleting your debt. When you're in the black, you can charge again, this time paying the total sum due each month. Or just close the cards. There's no law that says you have to possess a credit card, although a thin credit portfolio could cause problems if you want a loan in the future.

Also, keep in mind that there are other ways to consolidate debt. Here are three more:

  1. Personal loan. You can ask your bank if you would qualify for a loan that would absorb your debt. They wouldn't charge balance transfer fees, but there would be interest to deal with, so find out what the rate would be. If it's lower than the average of what you're currently being charged, you'll come out ahead. The advantage is that this type of loan forces you to pay in fixed installments. You'd need excellent credit to qualify, though, so if you don't  have that, you're out of luck.
  2. Home equity loan. If you own a home and have built up some equity, you may be able to borrow against it and add what you owe to the balance. These loans usually have rates that are lower than those for credit cards, and the interest may even be tax deductible. The problem? Shifting unsecured debt to secured debt is risky. If you can't afford the payments, you could lose your property. I don't normally recommend this method, but you should know it exists.
  3. Debt management program. Credit counseling agencies help people develop budgets and offer arrangements where you pay your credit card bills through them for a small monthly fee. The plan is designed to put you in the clear within five years. As long as you have enough cash to cover your essentials, close the cards and promise to not to borrow more while you complete your program, you can use this service.

With all this information in mind, you can now choose the best path to a debt-free life!