Options 4 and 5 of my Six Recommended Plans of Action both involve using balance transfers to pay off your debt. You can use a consolidation loan or a balance transfer card.

Both area great, practical methods that make the debt treadmill easier to handle. It will reduce the amount of time it takes for you to pay off your debt, and you’ll be able to keep most of the money you’re currently paying interest on in your bank account.

So how do you know which one to choose? Let’s compare them to find out.

Consolidation Loans

This was my immediate go-to plan. I couldn’t afford the minimum payments and interest charges I was paying.

The Credit Counselling Society lists the reasons why this might be a good option:

1. Living expenses have gone up and now they can’t make monthly payments on all of their debts.
2. High interest credit card debt is eating into their budget, they want to pay off these cards but they’ve been turned down for a bank loan.
3. Have been keeping themselves afloat using a line of credit or bank overdraft for paying debts.
4. Unable to refinance their mortgage to consolidate debts like they have in the past.
5. An accumulation of payday loans due to debt problems, lost or reduced income or unaffordable car loan payments.

So exactly is a consolidation loan?

A debt consolidation loan is when you borrow money to use to pay off debt. It doesn’t sound like a great idea at first, right? Borrowing money to pay off borrowed money? Don’t be fooled, though. This is a great option.

What happens is that you end up paying off ALL of your debt using one loan. Then you work your tail off to pay off your consolidation loan. You can often get them with very low interest rates, which is why this is such a great option. It eliminates the burden of having to pay often high individual minimum payments and high interest charges if that’s the situation you’re facing.

If your credit rating has suffered because of your debt, there’s a good chance you won’t qualify for a debt consolidation loan. This is what happened to me.

I met with an advisor at Scotiabank and she helped me apply for a line of credit, but they wouldn’t approve my application. I knew that applying for too many loans and credit cards would wreak even more havoc on my credit score, so I did some research and decided to apply for one more line of credit with PC Financial. I recommend PC Financial, not only for lines of credits or credit cards, but because they have absolutely 0 bank fees! I’m going to be writing about the effects of bank fees later this week, so stick around!

When I met with the advisor at PC Financial, he told me my credit was decent (my jaw may have dropped when he said that) and he informed me that I had been pre-approved for the $10,000 line of credit I applied for. I was hopeful about this one, but I soon found out I had once again been denied for the loan.

Now back up to my meeting with an advisor at Scotiabank. She warned me that I might not get approved for the line of credit so she also helped me apply for a lower-interest balance transfer card.

This brings me to option 5:

Balance Transfer Cards

Once again, I’m bringing some credit card knowledge to you straight from Beverly Harzog.

One of the best ways to get rid of—or at least pay down—your credit card debt is to transfer your credit card to a balance transfer credit card that has a zero percent introductory APR.

Source: Confessions of a Credit Junkie

How does a balance transfer card work?

A credit card company will agree to move your existing debt, which is likely high interest, to a new account with a low interest rate. However, this low rate is merely an introductory offer. Customers who use this method don’t often pay off their debt before the introductory period is over, which means these types of cards are very profitable for credit card companies.

Don’t let that scare you off, though! Compare some low interest cards and use their introductory rates to determine if you’ll be able to pay off your debt in that period of time. Generally, the longer the introductory offer, the better. So even if you realize you can pay off your debt in 15 months, go with the card that has an introductory offer of 18 months. I recommend striving to pay the debt off in 15 months anyway, but this will give you a bit of a safety net if something happens and it takes longer than you thought to pay off your debt.

A few FYI’s to keep in mind when deciding if this is the right option for you:

1. There is usually a balance transfer fee that is applied to the new card. This fee is often between 1%-5% and is based on the amount of debt you transfer over. For example, of you transfer $5,000 to a card that has a 3% transfer fee, you’ll be charged $150.
2. Don’t miss credit card payments! When you miss a payment, you become ineligible for the promotional rate.
3. Don’t use your credit card. Even though a balance transfer card has a great, low interest rate, be sure to maintain your debt-repayment determination. The last thing you want is to end up with more debt than your had in the first place.

I wasn’t approved for the low-interest card my Scotiabank advisor helped me apply for. Don’t let that discourage you, though. My credit score was a disaster because my AMEX was overdrawn, and even my minimum payments weren’t enough to get my balance below the card’s maximum balance.