If
credit cards have become a way of life for you, it might be time to
organize your credit cards. If you have a lot of credit card debt, you
might even want to look at
consolidating your cards to a lower
rate card that will save you in interest charges. Be careful, done
incorrectly, canceling and consolidating credit card debt can harm your
credit.
Before you consolidate, first you need to recognize
why you want to consolidate. Are you looking for lower interest rates? Do
you need lower monthly payments? Do you simply need to stretch out the
term of your loan? If you answer yes to one of the last
two questions, you should beware.
If you really just want to get out
of debt, you need to understand how you got into the mess. Then you can
fix the mess. Simply solving the problem with debt consolidation often
makes the problem worse. Too many people consolidate and then charge the
cards back up again.
If you know that you need to reduce
the number of credit cards you have open, start with determining how much
credit you need. How do you use your cards?
If you have several department store
and gas cards that you never use, you should go ahead and close them. You
also shouldn't need to pay a yearly fee for a credit card that earns you
gifts, like cash back or frequent flier miles. Pay attention to whether
you use the miles or not. You may find that what you are paying isn't
worth what you are receiving.
You really only need one or two
credit cards. Ideally, you need one card that is only used in emergencies.
There are several steps you can take to start consolidating your balances
into fewer cards.
Start by paying off all of the low
balance cards that you plan to cancel and then close the accounts. Then,
transfer your remaining balances onto the card that has the best interest
rate. You can't use this card or the other cards until it is paid off.
Now you need to have one or two
cards that have high enough balances to cover your charging needs. Make
sure that they have the lowest interest rates you can find. These should
be the only accounts you have open. IF you charge to them, make sure you
pay off each balance in full every month.
When it comes to balance transfers,
there are some questions you should definitely ask. Find out how long the
transfer rate lasts. Sometimes you can be given a rate for balance
transfers that only lasts a few months. Find out if the rate is just for
balance transfers, or is it for transfers and new purchases?
You need to find out about the fees
that apply. Is there an annual fee? Find out what the late fees and
over-the-limit fees are. Some institutions will charge balance-transfer
fees as high as 4%. The higher the balance, the higher the fee. Just add
it up: 4% of $5,000 is $200!
Read through your credit card offers
very carefully. A lot of information is hard to understand (and find).
Some offers waive the fees for the "initial balance transfer" only. This
could be your first transfer and not the additional ones.
Each additional balance transfer will be treated like
a cash advance and charged cash advance fees, which are very
expensive.
If you feel comfortable with the
terms offered to you, fill out the balance transfer form carefully.
Mistakes can mean that the transfer won't go through. Keep making the
minimum payment on your old card until you are absolutely sure that the
balance transfer has been completed. This can take two to four weeks. You
don't want to try to lower your payments and still receive a late fee and
penalty.
Even though the new card company
will contact you when the transfer is complete, you still need to talk to
your old card. Call and verify that there is no balance left on your
account. Write down the representative, time, date and what is said every
time you talk with a company over the phone.
Have your card company send you a
billing statement with a zero balance stated on it. You may need this in
order to clear up any mix-ups. Oh, don't forget to close your old card,
you don't want to accidentally charge on it!
There are some situations that can
occur when you are consolidating your credit cards. You don't want to
suffer because you are taking control of your credit. Manage your
transfers well and you should avoid errors.
Don't cancel a card that still has a
balance. This causes your rate to shoot up, because they know that they
have to get the most out of you now. Don't even tell a card issuer that
you are leaving until you have no balance. Many issuers will raise rates
if you cancel with a balance remaining.
Pay all of your cards on time no
matter what. It can take one late payment for your interest to go from 9%
to 28%. Amazing, isn't it?
Don't start canceling all of your
cards before you apply for a mortgage or car loan. This can make your
chances of approval even lower. Credit scoring is based on many factors,
including how much debt you have and how much you have available. If you
have cards with no balance on them, it can raise your credit
score.
You need to remember, even if you
find better terms for your debt, it is still debt. You must be sure that
you pay it off before you add to it. If you don't, then it will never end.
Consolidation doesn't offer you a
new start, just a better path to paying off your debt. If you truly want
to get rid of your debt, use consolidation as a way to put all of your
debt in one payment. And get out the
scissors.
