Paying down debt can be a very frustrating and difficult challenge, especially if your debts are spread across multiple accounts with different interest rates. But no matter how high your debt seems to go, there are always options. In particular, you can use balance transfer credit cards or personal loans to take control of your debt and start repaying it more actively. Let’s break down balance transfer credit cards versus personal loans, and examine their benefits, downsides, and determine which option is better for different situations.
A balance transfer credit card is a unique type of credit card used to help you pay off high-interest debt. Balance transfer credit cards are not opened for “regular” debt use, such as purchasing an expensive item or doing renovations. Instead, they're exclusively meant to be used to pay off high-interest debt in manageable chunks. Due to the way they work, individuals don't usually pay off all of their debts using a balance transfer credit card. Instead, they can use these cards to chip away at larger amounts of debt in progressive chunks to help save money on interest.
In a nutshell, balance transfer credit cards allow you to transfer your existing debt to their accounts. These cards usually have 0% APR for a certain, usually limited timeframe. Without interest, your debt sits on that credit card instead of your previous credit card without gaining interest. This allows people with lots of high-interest debt to pay off their debts without having to deal with interest. For example, say that you had $1000 of debt with a 10% interest rate. You could transfer $500 of that debt to a balance transfer credit card with a 0% interest rate for three months. So long as you paid off the $500 on the balance transfer credit card within three months, interest would only accrue on the remaining $500 of debt. Most balance transfer credit cards have relatively limited 0% APR timeframes (on the order of a number of months). This means that balance transfer credit cards are best used by individuals who can pay off chunks of debt in the near future but who don’t want to have to pay very high interest on top of that.
Balance transfer credit cards have a number of benefits that may make them an excellent choice:
Even though balance transfer credit cards could be a good idea, there are also some downsides to keep in mind.
The other big option for paying down large amounts of debt are personal loans. Personal loans, of course, are any loans you acquire from a financial institution designed to help you pay down personal debt, make personal purchases, and so on. Many people take out debt consolidation loans trying to manage multiple individual debts. They’ll then pay back the personal loan over time, based on the agreed repayment period and APR, often saving money on high-interest debts with a new lower interest rate.
Personal debt consolidation loans work by “consolidating” various types of debts into a single, easy to repay loan. For example, say that you have a variety of different debts weighing down your credit score:
Certain financial institutions could provide you with personal debt consolidation loans. If you find a debt consolidation or personal loan worth $1000, you could take out that loan and use the $1000 to immediately pay back each of the above three separate debts. Once you do so, those multiple debts will stop dragging on your credit score and accruing interest. Instead, all you now have to focus on is paying back your single personal debt consolidation loan with its attached interest rate, which is often lower than the rate of the debts you’re paying on.
Personal loans can be extremely beneficial debt repayment tools depending on your circumstances:
Though personal loans can be a great choice, you should also be aware of the potential downsides:
Both of the above options are powerful tools for handling your debt, especially if you have a lot of it from multiple sources. However, either can be a better option based on your circumstances:
Either option can be very effective, especially for individuals that make solid debt repayment strategies and stick to them. You may also consider using both personal loans and balance transfer credit cards in conjunction with one another to tackle different types of debt.
Ultimately, it’s up to you which of the two debt repayment strategies seems to be a better choice in the long run. Remember that institutions like Seek Capital are available to help you find the best balance transfer credit cards available to you. Contact us today to see what your options are and start taking control of your debt. Sources https://www.investopedia.com/terms/a/apr.asp https://www.experian.com/blogs/ask-experian/credit-education/score-basics/what-is-a-good-credit-score/ https://www.experian.com/blogs/ask-experian/credit-education/score-basics/what-affects-your-credit-scores/