Alternatives To Balance Transfers
If you're trying to get rid of high-interest credit card debt, transferring your balance to a lower-interest credit card, or even a card with a promotional 0% APR, isn't your only option. Here are some alternatives that might be better for helping you pay off your credit cards quickly and spend less money on interest.
Start a Debt Snowball
To create a debt snowball, you list all your debts from smallest to largest, then attack them in that order without regard to interest rate. You keep making minimum payments on all but the smallest debt, and you throw any extra savings and income at your smallest debt until it's paid off. Then, you repeat the strategy with the second-smallest debt, and so on until you've repaid everything you owe.
The idea behind a debt snowball is that by starting off small, you'll feel a sense of accomplishment sooner. A quick success will give you the momentum you need to keep going, even when you're staring down a huge stack of bills.
A major advantage of the debt snowball is that it doesn't require you to apply for a new loan or credit card, like a debt consolidation loan or 0% credit card balance transfer offer would. A disadvantage of the debt snowball method is that you might pay more interest since you aren't lowering any of your interest rates, and you might not be paying off your higher interest debts until several months or years into your repayment plan.
Attack Your Debts by Interest Rate
If you don't need the extra momentum and just want to get rid of your most expensive debt as quickly as possible, list your debts in order from highest interest rate to lowest, and attack them in that order. This strategy is called a debt avalanche. Throw as much extra cash as possible at the highest-interest debt while continuing to make minimum monthly payments on the others.
While this method might mean you're repaying your biggest debt first and working on the same debt for years before you get to the others on your list, it will cost you the least in interest. But if the knowledge that you're going to have six debts hanging over your head for years discourages you, the debt snowball might be a better option.
Refinance Your Debt
While you can't refinance your credit card debt (the closest thing is transferring a balance to a card with a lower interest rate), you can refinance a student loan, car loan or a mortgage. If you have any of these debts, refinancing into a lower interest rate will not only make that loan cheaper, it will free up your cash flow so you have more money to put toward your largest or highest-interest debt each month.
In other words, you can combine refinancing your other debts with either of the two above methods to speed up the elimination of your credit card debt and save money on credit card interest payments.
One caveat: Make sure your new loan interest rate will be low enough to more than make up for any fees or closing costs associated with refinancing. Also, be wary of extending your loan term. While it might make your monthly payment smaller, it might cost you more in interest in the long run.
Borrow Against Your Home
Home equity loans aren't just for kitchen renovations. You can use the money however you want, and that includes paying off high-interest debt. You might have credit card debt with an interest rate as high as 30%, while you might be able to get a home equity loan with a 7% rate. Not only is the rate dramatically lower, but the interest payments on a home equity loan are tax deductible, while those on credit card balances are not.
There are several significant drawbacks to using a home equity loan to pay off high-interest credit card debt. First, you're turning unsecured debt into secured debt. While the credit card company won't come to your house and take away the toys you bought on your card and resell them to pay off your debt if you stop making your payments, a home equity lender can and will repossess your house and sell it to recoup what you owe if you stop repaying your home equity loan. Do you want to put yourself at risk of foreclosure to pay off your credit cards?
Another problem is that taking out a home equity loan usually means borrowing a large sum. Banks usually require you to borrow at least $10,000 to make the transaction worth their while. If you're already struggling with debt, taking on a large amount of new debt is usually a bad idea.
Many if not most people fail to change the poor spending habits that got them into debt in the first place and end up worse off – with more total debt – when they try to shuffle debt around to get a lower rate. Finally, if you're already in trouble with debt, your credit score might not be good enough to qualify you for a home equity loan, or you might not be able to get a good rate.
The Bottom Line
There are many strategies available for paying off high-interest debt. Transferring a balance from a high-interest credit card to a lower-interest card is one option, but obtaining more credit puts you at risk of incurring more debt. So does using a lower-interest home equity loan to pay off higher-interest debt.
Either of these options can save you money and help you get out of debt faster if you're highly organized and disciplined. If you struggle to spend within your budget, attacking your existing debts from smallest to largest – or from the highest interest rate debt to the lowest – might seem more expensive on the surface, but in the long run they'll cost you less if they prevent you from taking on new debt. For more on why you need alternatives, see Understanding Credit Card Balance Transfers.