Instead of Taking Out a Loan to Pay Debt, Do This First

This could be an easier option.

Are you facing down a pile of debt, wondering how best to pay it off? You have a lot of options when it comes to getting rid of debt. You might consider paying off your debts one by one, either by prioritizing the lowest amounts first (the debt snowball method). Or you could look at targeting your highest-interest debts first -- this is the debt avalanche method, and you'll save more on interest with this approach than you will with the debt snowball.

But if you're having trouble managing multiple debts (multiple due dates, multiple payment amounts), you might look at consolidating your debt instead. This is when you borrow a sum of money to pay off all your debts at once, then you pay off the amount borrowed on a set timeline. There are multiple ways to approach this, too.

A personal loan is a common way to consolidate debt, and if you go this route, you could end up with a much lower interest rate on that loan if you have good credit. But there's a way to consolidate your debt that comes with no interest at all -- if you can finish paying it off before interest is assessed. If this sounds appealing to you, consider consolidating your debt with a 0% APR credit card.

How do 0% APR credit cards work?

Some credit cards come with an introductory period of 0% interest. Sometimes these are designated specifically as balance transfer cards, to reflect their use in debt consolidation. These can help you save money in the course of paying off your debt, because once you move all your existing balances to the card, you won't be charged more interest on them for a designated period of time. This could be as long as 21 months for some cards.

You may have to pay a balance transfer fee, however, and this is usually a percentage of the balances you're moving to the card. You can use a balance transfer calculator to see if the card you're considering will help you save money on your debt payoff.

How do you know if this method will work for you?

Not every debt payoff method will work for every person, so it's a good idea to consider whether a 0% APR credit card is a good way to consolidate your debts. Consider the following questions:

• Do you have a good or excellent credit score? You will need it to qualify for the best 0% APR credit cards.
• Are you having trouble managing multiple debt payments? If you have, say, five credit card balances to pay off, but can handle keeping track of the payments, the debt avalanche or debt snowball method might be a better fit for you (and will save you the trouble of applying for a new credit card, transferring your balances, and potentially paying balance transfer fees that may not save you money).
• Do you want to avoid accruing any more interest? If you can manage to pay off the new credit card in the time allotted for the 0% APR, you won't have to pay any additional interest. If you can't, however, you may be charged interest on the original balance once the interest-free period is over. So plan carefully, and work out your own payment schedule. For example, if you have 15 months of 0% APR, divide the card's balance by 15 to get your minimum monthly payment to avoid interest.

If you're ready to consolidate your debts to make paying them off easier, don't assume that a personal loan is your only option. Consider 0% APR credit cards too, and make paying off debt easier while getting a break from earning interest on your balances.