Credit card consolidation involves taking out a loan to pay off other credit card debts. Facilitated by a debt consolidation company, borrowers agree to pay one negotiated payment each month, rather than paying off numerous bills separately. This simplified payment system benefits many consumers who may feel overwhelmed at the amount of checks they’re sending out each month.
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Additionally, credit card consolidation often reduces monthly payments, as well as the interest payments because debt consolidators negotiate with creditors on the borrower’s behalf. The debt consolidators will agree to pay off the creditors in full on the borrower’s behalf, which gives the consolidators more bartering power to reduce interest owed. Then the borrower will repay the consolidator, as initially agreed, each month until the reduced amount is repaid.
Not all consolidation companies are looking out for consumers, the FTC (Federal Trade Commission) warns. Borrowers should look for debt management programs that have enrollment fees of $50 or less, have a good rating with the Better Business Bureau and carry an overall interest rate of 9% or less.
Benefits of Transferring Balances to One Credit Card
Credit card balance transfers allow borrowers the ability to take multiple credit card debts and move them over to a new credit card that has a lower interest rate. Often balance transfer offers advertise 0% interest (for six to twelve months), which is a good deal for someone who simply can’t get ahead because of 28% interest rates. With more money going toward the principal balance, rather than just the interest, many people are able to pay off their debts much faster. The borrower can save thousands in interest if he or she can manage to pay off the debt within the designated timeframe.
Dangers and Fees of Credit Card Consolidation
There are many things to consider before consolidating. Credit card consolidation is only good for those who can be disciplined enough to stop creating new debt (not using credit for anything until the debt is paid off) and who can adhere to the arranged repayment schedule. One missed or late payment is extremely costly and could easily tack on 28% interest to the full balance. According to Chris Vaile of Cambridge Credit Corp, 70% of Americans who take out a credit card consolidation loan wind up with similar (or higher) debt loads two years later.
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Another con to credit card consolidation is that the loans may be for longer terms, which can add thousands in interest in the long run and can take more time to pay off. Usually interest charges range from 7% to more than 25%, depending on the borrower’s credit score. Also, these loans are sometimes hard to get. For example, MBNA’s Clean Sweep Program offers $25,000 but only to borrowers with decent credit scores who have a good repayment history for five years or more.
Dangers and Fees of Transferring Balance to One Credit Card
There are dangers to transferring credit card balances to one 0% interest card. These low rates only last for a limited time and if the borrower pays on time each month. One missed or late payment can jack up the interest rate higher than it was before. Only responsible borrowers who can make timely payments in full should even consider a balance transfer.
Secondly, there are generally fees associated with transferring balances. Some fees are 3% of the total amount owed (so it would be $600 on a debt of $20,000). These fees vary with each lender, so borrowers should read the fine print before signing anything.
Thirdly, it’s difficult to find 0% interest credit cards with high limits. In some cases, borrowers are lured by promises of transferring all balances over only to find that they still have several credit cards because the limit on their new card wasn’t high enough.
Lastly, if a borrower closes out all the other credit cards and keeps just one, the total amount of available credit may be reduced, therefore taking points off the borrower’s credit score. About 15% of the overall score is based on the length of credit history (so if the accounts are closed, the history appears shorter). More importantly, 30% of a credit score is based on the amount of available credit used (so if the credit lines are closed, the borrower appears to be using more of the total credit extended to him or her.)
There are dangers to transferring credit card balances to one 0% interest card. These low rates only last for a limited time and if the borrower pays on time each month. One missed or late payment can jack up the interest rate higher than it was before. Only responsible borrowers who can make timely payments in full should even consider a balance transfer.