If you are trying to get rid of high-interest credit card debt, transferring your balance to a credit card with a lower interest rate or even a card with a 0% promotional bonus is not an option. Your only option. Here are some alternatives that might be better to help you pay off your credit cards quickly and spend less money on interest.
Start a debt snowball
To create a debt snowball, list all your debts from smallest to largest and then attack them in that order, without regard to the interest rate. You make minimum payments on all but the smallest debt, and you throw additional savings and income at your smallest debt until it is paid off. Then repeat the strategy with the second smallest debt and so on until you've paid off everything you owe.
The idea behind a debt snowball is that if you start small, you're more likely to feel a sense of accomplishment. A quick win gives you the momentum you need to keep going, even if you're staring at a huge stack of bills.
A big advantage of debt snowballing 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. One downside to the debt snowball method is that you could be paying more interest since you're not lowering any of your interest rates, and you may not be paying off your higher interest debt until several months or years into your repayment plan.
Grab your debt with the interest rate
an If you don't need the extra oomph and want to get rid of your most expensive debt as quickly as possible, list your debts in order from interest rate to lowest, and attack in that order. This strategy is called a debt avalanche. Throw as much extra money as you can at the highest interest debt while continuing to make minimum monthly payments on the others.
While this method could mean paying off your largest debt first and working on the same debt for years before getting to the others on your list, it will cost you the least in interest. But if knowing you have six debts hanging over your head for years discourages you, the debt snowball might be a better option.
Refinancing your debt
While you can't refinance your credit card debt (the next thing is to transfer a balance to a card with a lower interest rate), you can refinance a student loan, car loan or mortgage. If you have any of this debt, 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 debt with one of the two methods above to speed up the elimination of your credit card debt and save money on credit card payments.
One caveat: Make sure your new loan interest rate is low enough to more than offset any fees or closing costs associated with refinancing. Also be careful about extending your loan term. While it might make your monthly payment smaller, it could 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 could 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 rate of 7%. 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 turn unsecured debt into secured debt. While the credit card company won't come to your home and take away the toys you bought on your card and resell them to pay off your debt when you stop making your payments, your home equity lender can and will repossess your home and sell to recoup what you owe when you stop repaying your home equity loan. Do you want to put yourself at risk of maxing out your credit cards?
Another problem is that taking out a home equity loan usually means borrowing a large sum of money. Banks usually require you to borrow at least $10,000 to make the transaction worthwhile. 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 get worse – with more total debt – when they try to swap 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 for paying off high-interest debts. Transferring a balance from a high-interest credit card to a low-interest card is an option, but if you get more credit, you risk taking on more debt. The same applies to a low-interest home loan to pay off higher-interest debts.
Any of these options can save you money and help you get out of debt faster if you are well organized and disciplined. If you're having trouble spending within your budget, your existing debts from smallest to largest – or from highest to lowest – may seem more expensive on the surface, but they'll cost you less in the long run if they prevent you from taking on new debt. For more information on why you need alternatives, see Basic information on credit card balance transfers.