Why I chose debt consolidation over a balance transfer credit card

Over the summer I noticed I was not making a lot of progress on my debt, even though I was using the same debt payoff strategies I had seen success with and it was frustrating me.

Upon further calculations, I saw this was because of the high-interest rate (close to 30% combined) on the outstanding balance on my line of credit and credit card and the fact that I was only making minimum payments towards them did not help. 

When I realized exactly how much I was paying in interest alone I knew something had to change. It’s important to note that I had already switched my credit card to a lower interest rate earlier in the year, relinquishing my access to rewards because it wasn’t a priority at the time. 

I booked an appointment with a financial advisor at my bank to see how else they could help me. 

That afternoon, he advised I apply to consolidate my debt. This meant borrowing a loan to pay off all my outstanding obligations and then just have one loan to repay instead.

It’s the last thing I wanted to hear because a year prior I had applied to consolidate my debt and been rejected due to my immigration status. 

On top of this, it’s becoming harder to consolidate your debt.

But my advisor assured me that now that my immigration status had changed and I have a longer credit history and higher-income it actually increased my chances.

The last time I took up the bank on an offer I ended up in a worse situation ( I took out a line of credit to pay off my credit card, but I didn’t have my priorities in order so I spent the money instead). I took the application home to do my own investigation on how to dramatically reduce or cut my high-interest rates. 

The more I researched at home, the more I started receiving ads for low balance transfer credit cards on my social media. I had never heard of one, but it was something that caught my eye.

As the name suggests, the credit card allows you to transfer debts from your existing credit cards to a single, low-interest card. Some of the cards have introductory interest rates as low as 0%.

And so the debate began… would I apply to consolidate my debt or would I apply to transfer for a balance transfer credit card?

When considering between the two I compared the interest, fees, and most importantly, which option would work with my budget.

A case for the balance transfer credit card

The advantage of a balance transfer credit card is that if you have the cash to repay your outstanding balance, a lower interest rate means more money will go towards the debt and less towards interest. This means you can pay off your balance a lot quicker.

Another advantage of a balance transfer is having only one monthly payment to worry about. 

You’ll no longer have to worry about keeping track of different interest rates and fees on different debt.

The best way to take advantage of a balance transfer is to take the amount of debt you're transferring and divide that figure by the number of months the introductory period lasts. You’ll then have an idea of how much you need to pay every month to get rid of your debt.

However, when it comes to balance transfers, you will need to be wary of unexpected charges and other conditions. 

For example, a minimum balance transfer fee — usually 1% to 3% of the total amount you are transferring onto the new card — may be charged. Another example is if you miss even one payment, your interest rate will reset to a much higher rate, effectively negating the main appeal of the card.

You’ll usually have to pay a minimum balance transfer fee, usually a percentage of the amount that you transfer. An example on the Government of Canada’s website shows if you transfer a $1,000 balance to a different credit card with a balance transfer fee of 3%, you'll be charged $30 for the transfer.

Most balance transfer cards also levy extra fees and surcharges on transfers. 

“The whole process is about mindfulness. You have to truly ask yourself ‘will I be able to pay this off in six months?’” said Elena Jara, director of education at Credit Canada Debt Solutions.

“If you know that your money's already tight, let's look at another method.” 

A case for debt consolidation

“If it's done properly, debt consolidation can definitely be a good tool to accelerate debt pay off and reduce your overall interest,” said financial planner Heather Holjevac.

LowestRates.ca shows, for example, you may be paying 5% interest on your student loan, 18 % on your credit card debt and 10% interest on your car payments. When you consolidate your debt, the interest rates are averaged together into a single rate. In this case, the interest rate could be approximately 10% or 11%. In many cases, this means that your overall interest costs are much lower than they were before you consolidated your debt.

Consumers can use this as a tool to deal with student loan debt, credit card debt and other types of debt.

Apart from my fear of my application being denied, a huge red flag was that my minimum payment would actually increase from about $250 to $400 per month, meaning more pressure on my monthly budget. 

I was also concerned about incurring more debt because the loan would give me access to credit again. 

“The problem sometimes is that people think that now I've consolidated my debt and I still have access to the funds on the credit cards that I've consolidated I can reuse them,” Holjevac warned.

“So some can get into a worse position.”

The decision

Paying as low as 0% interest, even if temporarily, sounded like a sweet deal at first, but as soon as I did the math I realized I couldn’t pay off my debt in the six month grace period offered — so I chose to apply to consolidate my debt. Luckily for me, it was approved.

If I had not done that simple calculation, my interest rate on the low balance transfer card I was considering would have jumped to a minimum of 19,99 % after six months — meaning I would be back in the same boat I was when I started (battling high-interest rates). 

Even though my minimum payment is higher (I’ve since made adjustments to my budget to be able to afford the payments), I’m optimistic about my finances. 

“Remember to be committed to staying out of debt,” Jara said about my monthly payment concerns.

“Once you align yourself with the idea of being debt-free and completely committed to being debt-free, those sacrifices, don't seem like sacrifices, because you're asking yourself consistently ‘is this need? Or is this a want?’” 

Whichever route you are taking to accelerate your debt payoff journey it’s important to make informed decisions by doing your own research and consulting professionals. All the contemplation and consulting has landed me in a much better scenario.

Since I have consolidated my debt, I’ve shaved off a year of my debt payment plan as long as everything goes according to plan.  A bonus is that since I’ve begun practicing responsible credit management, my credit score has gone from fair to excellent in just two months.