Things You Must Know Before Consolidating Credit Card Debt

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Author: James Kronefield

Article source: http://www.articledeshboard.com/. Used with author's permission.

Credit Card debt is a huge problem facing American today. It can be advantageous to consolidate your credit card debt under the right circumstances. Often you can transfer your balances for a "teaser" rate, which is much lower than prevailing interest rates. The "teaser" rates are usually either at 0% to a very low interest rate. The duration of this rate is typically from 6 months to 1 year. This would allow you to only have to make one payment each month, which minimizes your chance of having a late fee. But, if you are late with your payment, you will lose the low interest rate.

If you are doing business with only one Credit Card company, you might be able to re-negotiate a lower rate after the introductory rate expires. However, if your credit rating is poor, it might be difficult to obtain a new credit card with a "teaser" rate and the revised interest rate might be higher than you were previously paying.

Credit Card companies have become sophisticated and changed the way they do business in the last few years. If you consolidate your debt on one credit card, and then use that same credit card for purchases, you could be in for a big surprise. When you pay your bill, the payment goes against the loan with the lowest interest rate first. So, if you accepted a teaser rate at say 0%, any payments you make will go against the lowest rate (0%) first. The purchases you just made (which will have a high interest rate) will begin to accrue interest at a high interest rate. Unfortunately, you cannot designate you payment to reduce the balance with the highest rate first. You might actually wind up with a higher overall interest rate.

Banks have also begun to track "switchers." individuals who move balances from one "teaser" rate to another "teaser" rate. This is a very costly and unprofitable segment. One of the initiatives developed by credit card companies to combat this behavior is to charge a fee for balance transfers to low introductory rate cards. Obtaining cash upfront offsets some of the cost of lending money at below market rates. This behavior could reduce your ability to get credit cards in the future. Also, if you are transferring from one teaser rate to another low interest rate each year, your credit score could be negatively impacted since one of the factors in a credit score is the number of credit reports requested.

So, if you do decide to consolidate your credit cards, I would suggest using two cards. One card which will have a very low or 0% interest rate and a second card used only for current purchases. But make sure you pay the entire bill of the second card each month.

Advantages

If you can get lower interest rate - "teaser"

1 check to write

Less chance of late fee

Closing credit card accounts could help you credit score

Disadvantages

Can't use that card for new purchases..typically higher interest rate More companies charging Balance Transfer Fees - began in 2001 Banks check to minimize your chance of transferring to another "teaser rate"

Will try hard to sell you other products like payment protection.

You can also find more info on personal finance loans at www.personalfinancehelper.org