3 Debt Options That Probably Won’t Save You Money

I’m always amazed by the number of commercials, print ads, and radio jingles dedicated to financial products and services. No matter how much we try to resist, they often get stuck in our heads for months (and sometimes years) whether we actually use the services or not. Remember the FreeCreditReport.com guy with his witty songs about everything from getting married to identity theft? How about all the commercials with celebrity endorsements, from Montel Williams encouraging payday loans to Alec Baldwin telling us to get a Capital One card?

What’s in YOUR wallet?

How do you decide what bank or credit card to use? Most people think first about the companies they’ve dealt with in the past. Then they may remember things they’ve heard from family and friends (or advertisers). Finally, many of us search online for reviews and information. All of those are good ways to learn more about our choices, but what if none of the choices we’re comparing are good ones?

All this exposure to information about saving money and reducing debt can fool us into thinking we know a lot about our options should financial disaster strike. In reality, we may not know the difference between a great idea and a terrible one. Not because people are idiots, but because we’ve been brainwashed by the influences of marketing.

Here are a few common methods people use to reduce debt, save money, or handle an emergency that usually don’t pay off in the long run.

1. Credit card balance transfers

It sounds like the best idea in the world - you have a credit card with a balance, and you can move that balance to a card with a lower rate. Sometimes you can get a 0% balance transfer, giving you the chance to pay off that debt with no interest! You’ll be out of debt sooner and pay less money.

Consider this: What happens if you can’t pay off the transfer before the promotional period ends? Usually a 0% rate is good for six months to a year. Do you know what happens at the end of that time? All the interest that would have accrued over those months is tacked onto your card balance, and the rate is more like 19% or even 25%. If you can’t pay the balance off in time, you could end up owing more than you did in the first place.

How to deal: Divide your balance by the number of months you have at the lower rate. For example, if you transfer a $1000 balance at 0% for one year, you have to pay a minimum of $84 a month to pay it off on time. If the payment isn’t possible for you, DON’T transfer your balance. Instead, focus on paying more than your minimum payment to pay down your debt as soon as possible. And STOP USING THE CARD. You can’t get rid of a balance if you keep adding to it.

2. Debt consolidation loans

I couldn’t tell you how many times I borrowed money to “consolidate” my debt and lower my monthly payments. I let a loan guy convince me that a loan looked better on my credit report than having a bunch of credit card debt. I even took out a private student loan once to pay off debt - I borrowed $9500 in 2004. After 7 years of paying on the loan, the balance is still over $7500. Dumbest idea EVER.

Consider this: Using a consolidation loan can be a great idea, but only if you no longer have access to your credit cards. I was able to cut my monthly payments nearly in half by combining my card balances into one loan with lower interest, but then I went out and charged up my cards again. So I was paying the loan payment AND the credit card payments. Going into more debt to pay off debt doesn’t make sense unless you are very disciplined.

How to deal: If you decide to consolidate your debt, cut up your credit cards. Or give them to a family member. Or melt them with a blowtorch. If you are already in trouble with debt, taking out a loan isn’t going to change your habits overnight. Websites such as Comparethemarket.com can help you choose the best personal loan if that’s an option you decide to pursue.

3. Debt management plans

Some debt management companies are awesome. (Like CareOne Credit, for example.) But many of them are total scams. Essentially, you are paying someone to make your debt payments for you. You are trusting them to use your huge monthly payments to pay off your debt in a certain length of time - but how many times have you read stories about people who were ripped off?

Consider this: Some debt management companies hold your monthly payments in an escrow account until there is enough money to wipe out a debt completely. In the meantime, none of your payments are being made and your accounts are sent to collections. Or the company mysteriously goes out of business and you can’t find a way to contact anyone.

How to deal: If you’re considering a debt management plan, check the company’s rating with the Better Business Bureau. Talk to real people who have used the service before. Make sure you understand EXACTLY what will happen to your money each month, and how it will affect your credit, before you agree to participate.

So What Should You Do?

Too often, we let all the advertising get to us, and instead of understanding the problem, we look for an easy escape. It would be great if you could just transfer a balance or enroll in a program and suddenly have more money. Hell, I’d sign up for that in a heartbeat. But it seldom works that way. Debt doesn’t like to relinquish its grip, and we don’t like to go without the things we’ve convinced ourselves we need.

There are only two ways to get out of debt: spend less or earn more. That’s it. All the options above can provide a temporary workaround, but none of them will help you without some serious lifestyle changes. Believe me, I’ve tried everything else - none of it did a bit of good in the long run.

If you’re struggling with debt, it’s time to decide - would you rather slow the bleeding temporarily with a band-aid, or fix it permanently with stitches? Stitches require more effort and are a little more painful, but a scar is better than a gaping wound. I’m glad that my debt is slowly fading into a scar from the past instead of an emergency that rules my life.

Have you tried any of the “quick fixes” above to get rid of your debt? How did it work out for you?

  • http://www.thefrugalista.com Natalie

    If you do a balance transfer, make sure that there is a low fixed rate for the LIFE of the transferred balance. If you have a large balance that will take years to pay off, it’s better to have a 2.99 percent rate for the life of the balance than 0 percent for only six or even 12 months.

  • http://www.dqydj.net PKamp3

    Oh yeah, on a BT - transfer and don’t touch it. The companies do funny things with the balances if you purchase using the card after you do the transfer.

    If you’re smart with your balance transfers you can pull it off - but I agree, most people are using them wrong. It isn’t free money!

  • Anonymous

    Oh yeah…. I have consolidated credit card debt into a credit line on my house. Ran up the credit cards again. Refinanced a mortgage and rolled credit card debt in that. Ran up credit card debt again. Working on paying down the last of the debt now.

  • http://www.taoofunfear.com Matt, Tao of Unfear

    I’ve used “No payments, no interest for X months” deals before. In hindsight, it was a dumb way to go about things, especially since I was usually buying stuff I didn’t need (although, arguably I needed the computer for school). Of course, I was always at least smart enough to do the math and figure out how much I had to pay each month to have it paid off before the promotional period ended. I always paid it off in time.

    I wouldn’t consolidate any other debt (though, with the exception of those promotional offers, I never carry a credit card balance), but I definitely consolidated my student loans. Since I can have the monthly payment based on my income, and I’m currently unemployed, that’s a real sigh of relief. Granted, thinking about what the interest is doing is a little nauseating, but I couldn’t do anything about it right now if I wanted to.

    On the subject of advertising though, I read a blog post about a year ago that talked about using the same methods as advertisers to get yourself to do positive things (save money, exercise, etc.). I created an advertisement for becoming more active by taking a picture of me backpacking and overlaying some text. I’ve lost 33 pounds, so I think it worked. The techniques definitely work for advertisers, so why not use them for ourselves?

  • Tanner E

    Thanks, I have been wondering about balance transfers… but after looking at the info, I don’t think I want to do that. Not for the time being, anyway.

  • http://www.moneyspruce.com/ Jeffrey Trull

    I haven’t tried these (thankfully) but I know others that have and it didn’t turn out well for them. I wouldn’t recommend these tactics to anyone else, either. There really isn’t a substitute for earning more and spending less like you pointed out.

  • http://add-vodka.com Daisy

    I so agree with the debt consolidation thing. Friends decided to do that and then kept using thier credit card. Completely ineffective. In fact, they did that so many times that they’re now tens of thousands of dollars in debt! It makes no sense.

  • http://www.squarepennies.blogspot.com Maggie@SquarePennies

    Very good points and explanation! If possible spend less AND earn more money. Then you can pay off the debt even faster. Changing habits makes a big difference.

  • Dee

    Hi Andrea

    What you said about credit card balance transfer offers is not true, though. I’ve done several balance transfers and when the promotional period ends, the interest begins accruing at that time. The interest does not backdate to when you first did the transfer.

    What you’ve described is what happens when you do a no payments for 12 months type deal from a furniture or mattress store. Those are different situations and in those cases, if you haven’t paid off the amount in full by the end date then yes, all of the interest that would have accrued had it been tallied from when you first made the agreement does add onto the loan.

    I thought the same thing, but talked with the credit card company and read the agreements before I did a previous transfer.

    • http://www.sooverdebt.com Andrea @ SoOverDebt

      I guess it depends on what card you’re using. I did two balance transfers where the interest backdated - sounds like you had much better luck than me!

  • 444express

    I think you might be confusing balance transfers with “no-interest-if-paid-before” deals. By the way, I don’t have a problem with the latter. I have taken six months to pay for tires and a year to pay for a computer, and paid no interest. You have to be VERY careful to get it completely paid off before the expiration date, of course, to avoid having accrued interest assessed.

    But balance transfers, to my knowledge, do not operate the same way, or at least I have never heard of one that does. I believe that most BTs offer a promotional rate (either 0% or a small APR) for a term like, for example, 15 months, and then at the end of that 15 months, the card’s usual APR for balance transfers will kick in. But there is no accrued back interest computed and applied. I just accepted several of these offers and I read the fine print and could not find anything like that. When the expiration date gets closer, I will call to make sure I understood completely. It’s good to ask beforehand, but I wanted to make this transfer regardless, because I usually have no trouble transferring stuff around if I want to avoid some sort of trick/trap.

    • http://www.sooverdebt.com Andrea @ SoOverDebt

      I just had a similar comment a few minutes ago; as I said then, you guys must be getting better deals than I did when I used balance transfers! I did two of them (after my credit was ruined, so that might have been the difference) and in both cases, I got hit with the interest from the whole promotional period when I didn’t pay it off on time.

  • http://twitter.com/DebtChronicles Travis Pizel

    Just wanted to point out that the debt relief plan that puts your money in escrow, sends no money to your creditor until you have enough money to negotiate a settlement for less than you owe is a Debt Settlement program. In a Debt Management Program (which is what I am enrolled in), a person pays every cent of their debt, but in a structured program with a negotiated monthly payment at a potentially lowered interest rate.

    CareOne is awesome, I’ll agree with that (they are my DMP provider)….My December payment will mark the halfway point through my program!

    • http://www.sooverdebt.com Andrea @ SoOverDebt

      Thanks for the clarification, and congratulations - I didn’t realize you were at the halfway point yet! Woohoo!!!!