With the economy in shambles, unemployment pushing 10% and a credit crunch that is squeezing tighter, consumers are searching desperately to consolidate credit card debt. Many ultimately decide to find that relief with some sort of debt consolidation loan.
With very few options, consumers often end up with a choice between a balance transfer or a debt consolidation loan as their options to get help with credit debt. Admittedly, the utility of one option over the other will depend mostly on of unsecured personal loans, and the options available to that consumer to consolidate credit card debt.
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Interest Free Credit Cards: A Short Term Option For Help With Debt
While not a long term solution for consolidating debt, a 0 APR balance transfer is an interest free way to consolidate credit card debt for about six to twelve months. If the consumer wanted to extend the consolidation for a longer period of time, he or she would search out other 0 interest credit cards near the end of the initial term and transfer the balance before the interest free credit cards offer expired.
However, there are three major disadvantages of using short term interest free credit card balance transfers to consolidate credit debt.
The balance transfer usually carries a 3-4% balance transfer fee. If the consumer is lucky the balance transfer fee would be capped at $50 to $75 dollars. However, in recent months, some issuers have been removing the caps on balance transfer fees.
Good credit scores are essential to access 0 APR balance transfers. If the consumer has missed a payment or made a late payment on any other bill, that fact will be registered with credit agencies. Issuers are unlikely to approve the application (especially one with a 0 APR balance transfer offer).
It is a gamble. when using interest free credit cards for consolidating debt, the consumer is "betting on the come" (to borrow a term from the game of craps). The consumer is betting that he or she will either be able to pay off the credit debt before the end of the time period or transfer the remaining balance to another interest free credit card.
That is a steep gamble, especially in our current economic climate.
As such, the interest free credit card should be reserved for those that can pay off the balance within six to twelve months.
Unsecured Debt Consolidation Loans: A Long Term Solution To Credit Debt
A long term alternative to the interest free credit cards balance transfer game is to consolidate debt with a low interest debt consolidation loan.
Unlike the juggling involved in the balance transfer, the unsecured debt consolidation loan takes the complication out of credit card debt relief. A debt consolidation reduces many credit card debt obligations to one single monthly repayment. The consumer does get the advantages of: (1) a single low monthly payment, (2) the security of knowing all other debts are paid, and (3) the peace of knowing that when the final payment is made, the consumer will enjoy complete debt relief.
What About Secured Credit Card Debt Consolidation Loans?
In most states, the consumer can open a home equity line of credit (HELOC) and use the equity in their residence to consolidate credit debt. However, in our current economic climate, home values have plummeted and there may be no equity upon which to draw.
Secondly, it is not a good idea to turn an unsecured debt into one secured by your personal residence. Credit debt is legally an unsecured personal debt. In other words, in most cases, the creditor cannot take your home in response to defaulting on a credit card.
When a consumer takes out a debt consolidation loan using a HELOC, they are turning unsecured debt into debt secured by his home.
This is rarely a good way to simplify family finances.
As such, when an unsecured consolidation loan not be available, a balance transfer is preferable even if it is a short term interest free credit card or low interest balance transfer option.
Do You Need A Short Term Or Long Term Debt Consolidation Solution?
If you have a small amount of unsecured personal debt that you could generally pay off in six to twelve months, then an interest free credit card is a good option for you. Be prepared for a balance transfer fee and be able to produce a good credit score. For those in need of longer term solutions help with debt and/or have bad credit, then an unsecured debt consolidation loan is the preferable choice.
Accessing a HELOC is not a wise solution for credit card debt relief.
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