Since credit card debt often comes with high interest rates (from 12-25%), it can be very expensive to leave a large balance on your card. Before you decide to either take out a personal loan or accept a zero- or low-interest balance transfer to pay off the debt from one of your cards, weigh all of your options and their consequences. Can you ask your bank or credit card issuer to lower the rate? Can you afford to pay off the debt without opening any new credit accounts? Spending a little bit of time finding the right answer can end up saving you money and protect your credit score.
Balance transfers are performed by switching one credit balance over to another credit card, usually for a low promotional rate over a limited time period. For example, it's not uncommon to receive a balance transfer offer that has a 0% annual percentage yield over the first six to nine months after opening the new account.
Personal loans should not be confused with peer-to-peer loans, although both are possible consolidation options for your credit card debt. Personal loans are provided by banks and credit unions and can come in secured or unsecured forms. These loans typically have lower interest rates than credit cards, especially if you secure the loan by pledging an asset, such as your car as collateral.
Which option you choose depends on multiple factors. For example, how your debt is currently distributed might limit your options. Even though many credit card issuers allow you to transfer over balances from multiple cards into your new card, not all do. Additionally, credit card balance transfers only make sense if you can pay off all or most of the debt during the promotional rate period. After the promotional period ends, you are likely to face another high interest rate on your balance, in which case a personal loan is probably the cheaper option.
You may also not be comfortable pledging collateral against a possible secured personal loan. If you default on your credit card debt, it's unlikely that the card issuer will sue you and comes after your assets. That changes when you open a secured personal loan; the company does take the asset to recoup its loan if you default.
Both options are likely to damage your credit score, even if you never miss any payments. Credit scores don't like it when a credit account is closed off in a way that does not honor the original credit contract. Older, consistently paid debt is more valuable than new credit accounts. You can also see your score dip if the option that you choose ends up increasing your credit utilization rate.
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How to Borrow Money at Zero Interest: Legally Eliminate Your Debt in Record Time, Utilizing Inside Information that Banks and Credit Card Companies Don't ... to Know (U.S. Credit Secrets Series Book 6)
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