I’m not going to sugar coat it: a combination of bad decisions and unfortunate events lead my husband and me to amass a considerable amount of credit card debt, once at the start of our marriage, and again five years later when we bought our first house. While, in both cases, we were making our minimum monthly payments, we knew we were never going to escape the debt cycle if we didn’t do something drastic. In each circumstance, we took a different approach — first a personal loan, then a balance transfer.
The Personal Loan
My husband and I met in college and graduated with our master’s degrees (and all the debt that entails) at the height of the recession. It took us both longer than expected to secure full-time employment, which included moving to a new city where the cost of living was much higher than the college town we’d just left. This on top of planning a not-super-lavish but still expensive wedding sent us into a five-figure credit card debt. The debt was split on multiple maxed out credit cards.
After weighing our options, we decided to apply for a personal loan from our bank to consolidate the debt. Our credit was good — paying your bills on times will do that — but having too much revolving credit prevents it from being great. While we could qualify for an unsecured loan, the rate was higher than we wanted, and the amount was not enough to cover all our debts. Since we had no assets to secure the loan, our loan officer suggested we get a co-signer. Fortunately, a family member stepped in, and with their help, we were able to qualify for the loan that more than covered our debts and at a very favorable rate. To get the lowest rate possible, and to appease our co-signing family member, we chose a payment plan that included automatic withdraws from our checking account. While the monthly payment was substantial, it was still less than our combined credit card payments, and we took solace in the fact the in five years, the debt would be completely paid off.
The Balance Transfer
After four years of regular payments on the personal loan and no revolving debt (as well as paying off a few other debts, better jobs with higher salaries, and more solid credit histories) we easily qualified for a mortgage (no co-signer needed)! Unfortunately, we did not foresee the number of home repairs that would be required, and this, on top of managing the soul-crushing daycare payments for our recently welcomed bundle of joy, led us into the familiar territory of five-figure credit card debt. This time the debt was on a single card.
We considered taking out another personal loan, as we had just finished paying off the last one (six months early)! This time, we owned a house we could use to secure it, but with a young child and minimal equity, we felt uneasy about the risk. We were also in a better place credit wise, and after researching our options, we realized we could qualify for a credit card that offered 0% APR for 21 months on balance transfers. Now, balance transfers present risks of their own — the largest one being that after the introductory period, the interest rate skyrockets. In this case, the interest rate after 21 months would exceed the current credit card rate where the debt resided. For this reason, we crunched the numbers, and only decided to transfer about half the debt, a figure we knew we could pay off easily before the introductory rate concluded. In two years (after the balance transfer is paid), our daughter will be in kindergarten, and we’re hoping this will give us more flexibility to manage the remaining debt.
If you find yourself in considerable credit card debt, personal loans and balance transfers are two options that can be used to effectively manage it, potentially saving both time and money in the payoff. I can’t say that one is necessarily better than the other, as it greatly depends on your situation, but some things to keep in mind…
Personal Loan Pros
These are what I like to call “set it and forget in” loans. When the loan originates, you’ll have defined loan terms (ours was five years), and as long as you make your payments each month, the debt will be paid at the end of the term. It’s okay to admit it, but if you’re a person who’s not great at managing money (I probably fall into this category), the personal loan might be the better option for you.
Person Loan Cons
Interest rates. With the exception of credit cards, personal loans have some of the highest interest rates compared to most consumer debt. There are things you can do to lower the rate (automatic payments, co-signers, securing it against a house or other property), but the interest rate is still there. By taking the automatic payment approach, we also found this somewhat limited our cash flow, since the automatic payment date never lined up exactly with our pay cycle. Personal loans also come with origination fees, so that’s something to consider as well.
Balance Transfer pros
No or very little interest. By doing a balance transfer, you can potentially save thousands of dollars in interest rates AS LONG AS YOU PAY OFF THE DEBT WITHIN THE INTRODUCTORY APR PERIOD. Because the interest rates are so low, you have the potential to pay off this debt much faster than a personal loan. Balance transfers also give you greater flexibility to manage your cash flow, so you can pay less (down to the minimum) and then pay more the following month. But if you take this approach, you’ll need to be very careful, so you can still PAY OFF THE DEBT WITHIN THE INTRODUCTORY APR PERIOD. Lastly, the process of obtaining a balance transfer is relatively painless and can usually be completed in 30 minutes or less online.
Balance Transfer Cons
These are credit cards. It is another revolving line of credit, so if you’re not careful, you can very easily add more debt. If you’re going to use a balance transfer to manage existing debt, I highly recommend that you don’t put the physical card in your wallet and don’t add it to any electronic payment services. Keep it in a safe place, and don’t use it until the existing debt is paid off. Use of a balance transfer also requires much more vigilance than a personal loan. The minimum payment will generally not get you to pay off before the introductory APR period ends. You have to make paying off this debt your priority, so you’re not trapped with an even higher interest rate at the end of the introductory period. Lastly, like personal loans, there is typically a fee involved in a balance transfer, typically around 2-5% of the total transferred amount.
Sara Anderson is a mother, wife, and environmental scientist based out of Philadelphia. When she’s not helping local governments plan for climate change, she enjoys exploring new or re-experiencing old things with her toddler, fixing up the 100-year-old row home she owns with her husband, or just binge-watching old TV shows with her cat curled up on the couch.
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