According to a recent study we conducted, a staggering 70% of respondents reported that balance transfer cards and consolidation personal loans not only failed to reduce their debt but often left them deeper in the hole or stuck in the same financial rut.

So, how did we get here? Why do so many people fail with these products? Is there a safe way to use them? What can the financial services industry do to make people more aware of the risks? Let’s explore.

What are balance transfer cards and why are they so appealing?

Balance transfer cards are a type of credit card that allows you to move high-interest debt from one or more credit cards to a new card with a lower interest rate, often 0% for an introductory period. This can help you save on interest payments and pay off your debt faster. Here is the appeal:

1. Save big on interest. Move your high-interest credit card debt to a 0% introductory rate. 
2. Get out of debt faster. Use the money you saved on interest to pay down your debt. 

What are debt consolidation loans and why are they so appealing?

Debt consolidation loans are personal loans used to combine multiple debts into a single, manageable monthly payment, often with a lower interest rate. This can simplify your debt repayment process and potentially reduce your overall interest costs. Here is the appeal:

1. Save on interest. Often times debt consolidation loans have much lower interest rates than credit cards. 
2. Simplify your debt repayment. Instead of making payments on all of your credit cards, you only need to make the payment on the loan. 

Why do people fail with these debt products?

Becoming debt-free isn’t just about the numbers. It is also a psychological and behavioral decision. People must make the tough choice every day to spend less or earn more. The problem with products like balance transfer cards and consolidation loans is that they create a false sense of accomplishment without addressing necessary behavioral changes. To make matters worse, a majority of lenders fail to warn consumers about the risks, creating the perfect storm:

1. Consumers take on more debt to pay off existing debt.
2. Their existing credit cards now have a $0 balance.
3. Because their behavior hasn’t changed, they start using their old credit cards again.
4. As a result, they end up with even more debt than they started with.

Is there a safe way to use these products? 

The answer is yes. Here are three essential steps to take before applying for one of these products:

1. Ensure consistent spending discipline: Spend less than you earn for at least three months. This demonstrates adequate behavior change, making you less likely to accumulate additional debt when you open a new account. Even if you have to pay more in interest during this time, it is worth the extra interest expense. 
2. Build an emergency fund: Set aside funds for unexpected expenses to avoid resorting to your old credit cards. Life always brings surprises.
3. Eliminate access to old credit cards: Cut them up and remove them from Apple Pay or Google Pay. There should be no circumstances where you use your old credit cards while paying off one of these accounts.

Does this sound extreme? If you think about it, so does the idea of paying down debt with more debt. To tackle debt effectively, you need to take extreme precautions.

The financial industry needs to do more to inform consumers about the risks associated with these products.

Most articles on these products barely mention the risk. This is because the owners of the websites writing the articles make money every time you sign up for the products. For example, in this article on balance transfer cards from Bank Rate, only 79 out of 1,543 words mention the risks related to increasing your debt. Also, the language about the risks is downplayed.

‍Bank Rate writes, “Some people get balance transfer credit cards with good intentions but find themselves racking up new balances on their cards, even as they work to pay off their old debt. If you can’t commit to paying off your credit card debt without taking on new debt, a balance transfer credit card might not be the right option for you, as it could land you in even more debt overall.” 

The writer’s use of “some people” downplays the vast number of people that end up in a worse situation. Furthermore, the author offers no advice on how to prepare for this type of financial product because Bank Rate profits when you sign up for this type of debt.  While I’m not claiming that debt consolidation and refinancing are the cigarettes of lending, the reality is that according to our survey, over 50% of people end up in a worse situation. Therefore, companies that are masking promotional content as educational articles owe it to their readers to dive deeper into what could go wrong. 

Conclusion

Balance transfer credit cards and debt consolidation loans offer significant appeal by promising savings on interest and a quicker path to becoming debt-free. However, as our survey shows the products are not living up to their promises.

The reality is that these tools alone can't solve debt issues without addressing the behavioral and psychological aspects of spending. Without proper discipline, they can lead to a new cycle of debt.

If you're considering these options, follow these steps: maintain consistent spending discipline, build an emergency fund, and eliminate access to old credit cards. These precautions are essential to avoid falling back into debt.

‍Study info: 

226 participants. 158 responded that their consolidation “didn't help me and I built even more debt” (119/53%) or “It didn't help me and I have the same amount of debt” (39/17%).