Credit Card Debt Consolidation Versus a Credit Card Balance Transfer: What’s the Difference?

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If you’re in the dark about certain personal finance terms, don’t worry – you’re not alone! For instance, many people looking for solutions to their credit card debt woes are unclear about the difference between credit card debt consolidation and a credit card balance transfer. While these terms aren’t synonymous, there is a relationship between them.

Ready to learn more? Let’s dig in.

First, the vocabulary

Let’s go over the definitions of credit card balance transfer and credit card debt consolidation before explaining how the two are related:

Credit card balance transfer – This means moving a credit card balance from one card to another. Usually, people choose to transfer a balance because they’re carrying debt on a card that charges a high interest rate. If they’re able to qualify for a card with a lower rate (or in some cases a limited time, 0% promotional rate), the opportunity to save money on interest is huge.

Credit card debt consolidation – This means paying off several different credit cards with one single loan or credit card; you’re literally consolidating several debts into one. Most people consider debt consolidation if they’re carrying a few high-interest balances and can get a lower rate on a consolidation loan or card. This will save money on interest and also simplify the debt repayment process because they’ll be making one payment instead of many.

Both of these strategies are useful for saving money on high-interest credit card debt. But there’s an important difference to keep in mind: Credit card debt consolidation necessarily means that several debts are being rolled into one. But a balance transfer can be just one balance from one card being moved to another.

What’s the relationship between balance transfers and debt consolidation?

It’s clear that balance transfers and debt consolidation aren’t the same thing, but you’ve probably picked up on their relationship: Many people choose to consolidate their debt with a balance transfer credit card.

Shifting several high-interest balances onto one card that’s offering a promotional 0% balance transfer rate is a way to combine your multiple debts into one. Again, the benefit to this is that you won’t pay any interest during the introductory 0% period (usually 6-12 months) and only manage one payment instead of several.

Nerd note: Keep in mind that consolidating your credit card debt with a 0% card is just one option. You can also consolidate with other types of loans, like personal loans or home equity loans. We recommend weighing the pros and cons of every consolidation choice before moving forward.

When to consider these options – and pitfalls to avoid

Credit card balance transfers and credit card debt consolidation make sense if you’re in the red on your existing plastic and need a way to reduce your interest rate(s). Not only will you save money on finance charges, but you’ll be able to repay your debt faster. After all, interest has a way of eating into your payoff progress!

However, there are some pitfalls to watch out for with credit card debt consolidation and credit card balance transfers:

  • Fees – Transferring a balance to a 0% card isn’t free. You’ll usually have to pay a fee of 3% of the balance transferred. Choosing other consolidation options can also result in fees; for instance, some personal loan issuers charge an origination fee. Be sure you know exactly how much it will cost you to reduce your interest rates!
  • Late-payment repercussions – If you make even one late payment during your 0% balance transfer promotion, your deal might be canceled and your could have to start paying interest immediately. If your on-time payment record is spotty, other consolidation options might be worth looking into.
  • Credit – In order to qualify for a 0% card or get the best rate on another type of consolidation loan, you’ll need very good credit. If this doesn’t sound like you, you’ll have to do the math to decide if consolidating is a good option at the rate you are able to get. Again, be sure to shop around – there are lots of personal loan options out there.
  • Ending up back in the hole – Whether you transfer your balance onto a 0% card or consolidate your credit card debt with a loan or lower-rate card, you’ll end up with at least one paid-off card in your possession. Resist the urge to charge it back up, or you’ll end up with more debt than you started with.

The takeaway: A credit card balance transfer isn’t the same thing as credit card debt consolidation. However, transferring several balances onto a low-rate card is one way to approach debt consolidation. In either case, be sure to avoid the pitfalls discussed above to make the path to credit card debt freedom as smooth as possible!

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