Credit card debt can happen to the best of us. There are plenty of excuses to go around, such as being young, financial difficulty, but out of control spending will just hurt you in the long run, making it tough to have extra money to save for the future, since you will be focused on paying back what you owe. Taking out a debt consolidation loan or transferring balances to another card can be a great idea as a way to pay off high interest accounts and set up a management payment, with a timeframe to rid yourself of the debt. While that may help you in the long run, there are a few drawbacks that you will need to take a look at to decide which is the best route to your path to financial freedom.
Balance Transfer Fees
No matter if you have an existing account or receiving an offer to apply for a new one, you will no doubt see balance transfer as part of the deal, trying to get your current balance from another card and over to them. You will see a promo APR that could be 0% for say 12 months, and it works out for the new company, probably figuring you won’t by off by then anyways and will start getting charged interest. The thing you have to watch out for though, is balance transfer fees, which could be up to 5% of what you are transferring, which could be a few hundred dollars depending on the balance.
A Hit to Credit Score
Every time you have your credit pulled, whether it is for a mortgage, a car lease, or a credit card, there is an inquiry put on your credit report that not only will stay on there for a couple years, but it will also bring your credit score down a tick. Now this can be a temporary dip if you continue on a good payoff plan without continuing to charge, but if you have multiple applications, you should see a serious impact to your score.
Interest Rates Still High
When you receive a credit card offer in the mail, basically everyone shows that there is a great interest rate waiting for you, even “pre-approved”, but no matter how it’s worded, they still need to check your credit to see your current standing, so by the time you apply, they review your credit, and you receive your approval, the interest rate could be sky high compared to what was offered because maybe your credit score wasn’t as high as they needed for that rate, so it’s a good idea of knowing what your credit score is before you start applying. Scores can now be reviewed on monthly credit card statements.
Paying More Over Time
While you may have combined accounts, and received a lower interest rate because you plan on paying off in 18 months on a credit card, or even lower, took out a debt consolidation personal loan to get a lower payment spread out over say, six years. This can lower your payments, but you will most likely be paying a lot more interest over time now that you spread the payments over the course of years before the debt is gone.
Freeing Up Credit to Use
Having credit cards is a big responsibility and takes willpower and discipline to not go on a spending spree, so once your debt is consolidated and paid off from the previous accounts, it now turns those still open accounts to a zero balance, essentially freeing up more credit available, which can be tempting to spend. Do yourself a favor and cut up the cards and throw away so you don’t go on a spending spree. Leaving the accounts open even though the cards are cut up is smart because at least you’ll still have the available credit to your overall credit profile.
It Doesn’t Get to the Root of the Cause
Last but certainly not least, if you do payoff all of your existing debt and go into a manageable payoff plan, it does solve getting your debt taken care, but it doesn’t solve the root cause of why you’re in debt in the first place. In order to stay out of debt, you will need to ensure that there is more money coming in than going out, reduce charge, and most importantly eliminating unnecessary charges that you continue to add to your statement balance every single month, putting yourself in a hole that can be difficult to get out of.