There are two schools of thought on paying off your debt. One (espoused most loudly by Dave Ramsey, I think) says that when you start paying off debt, you shouldn’t move it to lower-interest credit cards or loans. The other, which I believe to be the better choice, says that you should move high-interest debt to a lower-interest place before paying it off.
The Argument for Not Consolidating the Debt
I think the argument for not consolidating your debt makes some sense. Dave Ramsey essentially warns that if people with a debt problem free up a credit card (generally via a balance transfer, since balance transfer credit cards offer low interest, or even no interest), they’ll lose focus and the desire to pay it off. They may even accumulate more debt.
Maybe the debt won’t seem so pressing. Is a loan at 5% interest or 0% as pressing as a loan at 29.9%? Maybe you’ll see the $500 in available credit and use it.
Why Consolidation (of some sort) Is Probably a Better Choice
If you’re serious about paying off your debt, then you’re serious about paying off your debt. Sure, the interest rate will mean that you’re not in as serious financial trouble as before, but the debt itself is still there. A lower interest rate or fewer debts (if you’ve merged them) doesn’t affect your overall balance. It doesn’t affect how you came to be there in your life.
If you’ve racked up a lot of debt, then you’ve (probably) made a number of bad financial choices. It’s time to start making better ones, like paying off the debt and not giving away as much money in interest.
The possiblity of spending more on those now-unused credit cards can be solved by cutting them up or freezing them in a block of ice. Or close them, if it’s that hard for you to control your spending (I only suggest cancelling as a worst-case scenario, as it will affect your credit score).
When is a Lower Interest Rate a Better Choice?
A lower interest rate makes the most difference when your original debt was at a very high rate. For example, if you’ve got credit card debt at 29.9%, getting it down to something even like 7% will make a huge difference in how much you have to repay. This will actually speed up your debt snowball, not slow it down!
There’s no hard and fast rule about when you should look for a better deal vs. when you should leave well enough alone. Take a look at the numbers before you try finding a consolidation loan or balance transfer. Take into account how long you think it’ll take you to pay it off, what difference different interest rates will make over that time, and how much trouble it’ll be to move the money.
A 2% difference in interest rate may not be worth moving for unless you’re going to be paying off the debt for many years. On the other hand, a 10% difference will almost always be worth it.
Be Careful When Transferring or Consolidating Debt
You should still be careful when getting a loan to consolidate your debt or transferring it from one credit card to another. Try calling your creditor first to see if they’re willing to lower the balance themselves, since otherwise you’ll move it elsewhere. Make sure you work with a reputable company. If using a balance transfer card, read the fine print very carefully before signing up. Don’t use your balance transfer card for other purchases or take any more money out on the loan.
How have you handled debt repayment? Was it worth it for you to move any of the loans around to avoid paying more when you paid it off?