No matter what any of the personal finance books tell you, having debt isn’t something that you should feel ashamed of.  Don’t sweat it.  Most of us have had to take out loans for school or have had to live on credit cards for a while between jobs.  What matters is how you approach your debt and, if you are someone who is finding that trying to remember to pay six bills is just too much, consolidating your cards and loans into a single account is mighty tempting.

Last November, we published a post called “Which is Better for Raising your Credit Score: Personal Loan or Credit Card?”  Today we’re going to talk about those two things and how they apply to debt resolution because while a secured credit card really can be great for helping you raise your credit score, it can often become a major burden when it comes to consolidating your debt.

Using a New Credit Card or Balance Transfer

The problem with that 0% balance offer is that it is finite.  You aren’t really getting a card or balance transfer at 0% interest forever (or until it’s paid off).  What they are offering is a grace period of 0% interest for a period of time (usually six months to a year).  If you manage to pay off your entire balance within that time, great! Good for you!

If you don’t, though, you get hit with a hefty fee.  Why?  Because when that interest rate kicks in, it isn’t based on how much is in your account after the grace period.

When you transfer a balance on to a new credit card, interest starts accruing right away.  It simply isn’t applied to your account; instead, that amount is tracked separately.  Then, if you have even one penny left of that balance transfer after your grace period is over, all of that interest gets added to your account balance as a principle balance and it starts earning interest as well – usually at a much higher rate than if you had simply consolidated at a single interest rate from the beginning.

I recently saw a post offering still more reasons to skip the credit cards.  The creditrepair.com Facebook page posted “20 Do’s and Don’ts for Improving Your Credit Score”, which argued that the way you use a credit card or balance transfer is just as important as the amount of debt you’re carrying overall.  Credit utilization (aka maxing out a card as soon as you get it) is an important part of your credit score.

Debt Protest – Nov 28, 2008 by eric731, on Flickr.  This work is licensed under a Creative Commons Attribution-ShareAlike 2.0 Generic License.

Getting a Loan

Many banks offer what they call debt consolidation loans.  Often these have the same rules as a balance transfer on a credit card.  You get a very low interest rate for a short period of time.  Then, when that is over if you still haven’t paid off the loan, you get a huge chunk of interest tacked on to your principle balance.

This is why, if you are considering getting a loan to pay off your other debts, that you try simply for a personal loan.  If you’ve been paying regularly on your bills and have a pretty good credit rating (and a good relationship with your bank) this shouldn’t be a problem.  You’ll get a relatively low (compared to credit cards anyway) interest rate from the very beginning.

It is important to know that simply moving credit from one account to another will not “hide” your debt from any potential creditor’s you might be hoping to woo (like if you’re hoping to make your credit look cleaner in the hopes of being approved for a mortgage).  Potential creditors will still look at things like your debt to income ratio and how regularly you pay your bills.  They will see that you still have the same amount of debt.

Still, consolidating debts into a single bill is often what many people credit with setting them on the road to credit and debt recovery.  It helps you regain your sense of control and reduces your risk of missing payments or losing track of a debt.

Of course, whatever you decide, it is important to treat this consolidation effort as seriously as you would any other bill or credit account.