What's the best way to consolidate holiday debt?

Many shoppers apply for store credit cards in order to snag special holiday discounts. But these credit cards often come with high interest rates. If you’re worried about racking up too much debt, you could transfer your balance to a card with a low APR. Or you could apply for a personal loan. Let’s look at the pros and cons of using either option to consolidate your debt after the holidays.

The pros and cons of balance transfers

Through a balance transfer, you move the balance on a credit card with a high interest rate to a different card with a low interest rate. The less you pay in interest each month, the faster you can pay down your credit card balances. And depending on how high your credit limit is, you may be able to transfer multiple balances onto a single credit card.

• For more tips on budgeting and spending for the festive season, see our Holiday Financial Guide    
  

But balance transfers aren’t a foolproof way to consolidate holiday debt. For one thing, most credit card companies charge a fee to complete balance transfers. The fee could be anywhere from 3% to 5% of the amount you’re transferring.

Even if you qualify for a 0% promotional offer on balance transfers, it won’t last forever. You may have 12, 15 or 18 months before the regular APR kicks in. If you need more time to get rid of your debt, you may have to do another balance transfer in order to avoid interest charges. But then you’d have to pay another fee.

Consolidating holiday debt With a personal loan

Using a personal loan to wipe out holiday debt also has its advantages and disadvantages. You’re not going to find a personal loan with a 0% interest rate. In fact, if your credit score is in bad shape, you could get stuck with an APR above 30%.

Plus, you may have to pay additional fees. Some personal loan lenders charge an origination fee, which is calculated as a percentage of what you borrow. Having to pay an extra fee could make paying off your holiday debt more expensive.

There is one good reason, however, to opt for a personal loan over a balance transfer. With a loan, you wouldn’t have to rush to pay off debt like you would if you were trying to make the most of a temporary balance transfer promotion. If you buy a big-ticket item – like a deluxe entertainment system or a top-of-the-line appliance – you could consolidate your debt with a personal loan and potentially have several years to pay it off.

The bottom line

It’s best to avoid taking on too much holiday debt. But if that’s not possible, the next best thing is to be proactive about paying down your balances. Looking at how much you’ll owe in terms of fees and interest can help you decide whether you should transfer your balances or get a personal loan in order to consolidate your debt.