Q&A: When a balance transfer card trumps a debt consolidation loan

To Her Credit columnist Sally Herigstad
Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for CreditCards.com, and also wrote for MSN Money, Interest.com and Bankrate.com, and has guested on Martha Stewart Radio and other programs.

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Question Dear To Her Credit,
I am a 29-year-old mother of one. I've been working hard on my credit for the past couple of years, and my credit score is now 698.

I have a fairly new (one-and-a-half years) auto loan and three other lines of credit currently open. One is a Koh’s charge with a balance of about $25. I’m not worried about that one. Another is a PayPal credit account with a current balance of $301.

The last is a Capital One credit card with a balance of $1,525 with a credit limit of $5,000. The Capital One card was one of those deals where I got a good deal for the first year it was open, but now, starting my second year, the interest is really kicking in. It’s been around a $30-$40 per month. I obviously have not been paying as much monthly as I should to get it paid off. I pay a little more than, if any, above the minimum. Money’s been pretty tight lately.

I've been looking at getting a personal loan for approximately $1,800 to $2,000 to pay off my Capital One and PayPal cards. I haven’t applied yet; I’ve just been trying to gain more knowledge about what it would consist of. I consider myself pretty dumb when it comes to credit, financing, loans and whatnot.

Would it be a good idea for me to consolidate these two credit card bills with a personal loan? Is it worth it?  – Madison


Dear Madison,
Based on the amount of interest you say are paying on a $1,525 balance, I estimate your card’s APR is well over 20 percent on your Capital One card. That’s not good – with money being tight already, you’ll have a hard time paying off that card while paying high interest expenses every month.

Usually when someone talks about consolidating debt, they have a lot of different debt balances they need to pay off. They may be behind on some bills, and often have some in collections. Every month they face a mountain of bills and wonder which ones to pay first. Debt consolidation simplifies bill paying, stops collection actions by creditors and, in most cases, helps the debtor pay less in interest expense and other fees.

Your case is different from most. You have only two balances that you expect to include in the consolidation, and one of them is relatively small ($301). You don’t seem to be behind in your payments, so you’re not being bothered by collection calls. Your only purpose of debt consolidation would be to reduce your interest rate.

You could talk to your bank about getting a personal loan to pay off your credit card balances. Be aware that getting an unsecured loan (one that is not attached to a car, real estate or other asset), is not always easy and the interest rates can be higher than you what you’re hoping to pay.


Video: What is a balance transfer credit card?

Another way to consolidate just a couple of credit card balances, if you qualify, is to get a new balance transfer card with a low- or no-interest introductory rate. The introductory low-rate time period gives you a chance to make all your payments go toward the principal, and it’s a powerful motivation to pay off the balance before the introductory rate ends and higher interest rates starts. Check out the balance transfers offers at CreditCards.com. Currently, there are several cards offering 0 percent for from 12 months to 21 months for people with credit scores in your range.

With either a bank personal loan or a balance transfer card, you need to watch out for a couple of things. First, check out the balance transfer fee. Most balance transfer cards charge at least 3 percent on the amount transferred. So that would add $54.78 to the $1,826 ($1,525 plus $301) balance.  However, if you get a 0 percent APR for 12 months, for example, you’d still come out ahead as you would save a couple of hundred dollars in interest charges.  

The other thing to be careful of is not increasing your debt load. Many people have good intentions, but with a new loan or credit card, they have more funds available – and they use it. You have a track record of staying well below your credit limit, so I believe you can keep this from happening.

Despite the fact you consider yourself “dumb” when it comes to financial matters, I don’t think you are. You have a moderate amount of debt that you are working to pay off. You ask for advice when you need it. Your credit score is on the rise. Keep learning and working on your finances, and you’ll do just fine.

See related: How to avoid 5 traps of balance transfer cards, 2017 Balance Transfer Survey: Act now before 0 percent deals dry up, Best balance transfer cards

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Updated: 11-19-2018