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Credit card consolidation

Transfer balances, consolidate high-interest debt onto low-rate cards

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Rising interest rates and mounting credit card debt may prompt many consumers to look for ways to consolidate their credit card bills. Financial and money management experts say consumers should consider transferring high-interest balances to 0 percent or low interest credit cards if they can.

Credit card balance transfers

"Now is the time if you are able to do balance transfers," says Jim Tehan, a spokesman for MyVesta.org, a money management website. Anyone with minimum monthly credit card bills that exceed their available incomes may need "a temporary solution to lower their monthly payment right now," Tehan says.

The credit crunch and decline in home values means fewer homeowners can tap into home equity lines of credit (HELOC) loans to consolidate credit card debt. HELOCs had been a popular method to consolidate credit card debt prior to mid-2007.

"The market has changed and consumers need to be aware of that," says Brad Stroh, managing partner of Bills.com, a website that helps consumers manage and pay their monthly bills. "It's harder than ever to get a refinance loan or a HELOC loan due to the credit crunch."

Stroh's advice: "Think strategically. What that means is find the lowest rate instruments. For homeowners, first pursue a refinance and then a HELOC because those are your lowest cost of capital options and they are tax deductible --assuming you have equity that's available to you."

As for renters, "If you're not a homeowner, look for balance transfers or teaser rates on new cards to pay down your other debts. Shop for the lowest interest rate -- not the lowest payment." Methods of calculating minimum payments differ, and some that offer lower monthly payments are just stretching out your repayment, costing you more in the long run.

Read the fine print
Several credit card issuers offer balance transfer options. However, financial experts advise consumers to read the fine print and know the terms and actual costs they might incur when choosing these options.

Stroh notes that many consumers focus solely on the annual percentage rate (APR) charged on a credit card and ignore balance transfer fees, annual fees, late fees, over-the-limit fees and other costs that may be associated with using the credit card. "Now is the time to end that cycle," Stroh says.

"Research which cards might be the most beneficial for you before applying for them because you don't want to go applying for a lot of credit cards all at once," says Tehan from MyVesta.org. "That can drastically hurt your credit report and score."

He, too, recommends reading the terms and conditions of the credit card agreement. Look for whether balance transfer fees are capped. An example of a fee is 3 percent of the transferred amount up to a certain capped dollar amount, however, recently credit card issuers have been eliminating the cap. When reading the fine print, be sure to note whether this is the case. 

"There are always fees involved. Read about everything before you decide what to do. Look and see what the final rate is after the teaser time period expires," Tehan says. "It's very important to look and see what's going to happen after that. Chances are you will not have that credit card debt paid off after that time period."

Tehan says after consumers are armed with information, they should then consider bargaining for the best deal.

"Just call your current credit card company and say, 'Hey, I've been a customer for X amount of years. What can you do for me? I've got five offers in front of me for 4 percent.' Sometimes they can offer you something better," he says. Remember to ask politely.

Downsize your wallet
There's another reason to consider consolidating credit cards, says Lynne Strang, a spokeswoman for the American Financial Services Association Education Foundation, an organization that focuses on teaching money management skills.

"There is some value in using one or two cards to consolidate purchases," Strang says. Reducing the number of credit cards you have helps simplify your monthly budget and financial management routine. "When you get your statement at the end of the month, it's a lot easier to do that with a few accounts rather than getting several statements."

Honestly assess money habits
Strang says consumers should consider their own money management styles when determining which credit cards to keep.

"If you are a person who pays off your balance in full every month, then the benefits of the card and annual fees become more important than APR. If you don't, then APR moves up to the top of the list for things to look at on the card," she says. "The consumer needs to do an honest assessment of what type of card user they are, then choose a product that best matches up with that type of use."

People who have high interest rate credit cards should review their monthly statements and credit card agreements for terms and conditions.

"Take a look at what the terms are," Strang says. "There's lots of consumer choice today. If the card product that you currently have doesn't best suit your needs, there are many options out there to evaluate."

How many cards are too many?
How many credit cards should consumers have? Are 20 too many? Are two too few?

"We recommend that people have only two cards," says Tehan. "If you decide that you want more, that's' entirely up to you. Realistically, it's what you can afford."

He notes that those with numerous cards who are carrying balances on those accounts may be paying a considerable amount in interest each month.

"If you do have 20 cards and they're all maxed out, that could be a sign of a larger problem that debt consolidation may not help you with," Tehan warns.

How do you know when it's time to consolidate credit cards? "If you think you're having money problems, you are," Tehan says "If you can't afford the minimum payment, then you really need to take action. Consider consolidation, debt management, bankruptcy, paring down your expenses and cutting back on entertainment."

Stroh from Bills.com adds more words of warning about a common mistake made by those who consolidate credit card debt: "If and when you consolidate those credit cards, please put them in a bowl of water and stick them in a freezer and do not make the common error of running those cards back up. It is all too common that consumers pay them off, they exhale and then they go straight to the mall."

To see how much you can save by transferring to a lower interest card, check out CreditCards.com's balance transfer calculator

See related: Credit card balance transfers, Credit card debt consolidation, When balance transfers make sense

Published: December 30, 2008


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