Consolidating Credit Card Bills
Americans love credit cards. About 14% of us carry 10 or more. That's nuts.
On average, we carry about $4,000 in revolving credit per person, or around a trillion dollars for the whole country. This trend has been steadily increasing for the last decade. We like our credit cards.
What we don't like is the new approach credit card companies are taking to make money on that outstanding debt. New credit card legislation came into effect August 20th, 2009. The act changes the way credit card companies can make money from us by reducing the interest rate jumps and penalties for missed payments.
Under the new law, some of the old ways credit card companies extracted money from their customers have disappeared. They are left to make money in other ways -- higher initial interest rates and introducing annual fees. This means the money you have outstanding may suddenly cost you more, even if you don't miss any payments.
This is where consolidation comes in. Why pay 5, 6 or more different cards, all with different interest rates (and new annual fees) when you can combine all the debt into one package, maybe with a lower overall interest rate?
The math makes sense. The problems come in when you start looking over the options.
- Teaser Card -- The old way was to sign up for a 'teaser card', one with an introductory, artificially low rate, no annual fee and a higher enough balance to transfer all your debt to the new card. This is one way we got those 10 different cards in our wallets! It doesn't work anymore. Every credit card company is raising interest rates and considering annual fees. Most are also reducing credit limits. The days of card-hopping are largely over.
- Personal Loan -- The second popular way is to take out a loan (usually a credit union) with a fixed rate and simply pay off cards. This is still viable, but leads to a real danger of treating this new loan as something other than credit card debt and slowly building up your balances on the very same cards you just paid off.
- Home Equity Loan -- Those lucky enough to have equity in their homes in the current down market can take out a second mortgage to kill off major credit card debt. This is usually a low-to-medium interest fixed loan. The advantages are a small tax deduction and the possibility of paying off large debt. The downside is a loan that stretches out current obligations for years (possibly decades).
- Debt Relief Company -- With the downturn in the economy and the rise in credit problems for average consumers, debt consolidation companies have sprouted up to fill the need. These companies will negotiate on your behalf with credit card companies and act as a sort of escrow -- you pay them and they disburse the funds. You may still need to take out a loan of some type, but the advantage is one company to pay and usually a reduced penalty/interest rate agreement with your lenders.
The bottom line is that consolidation makes sense
on one condition. The trap is that the sudden relief of getting out from under burdensome credit card debt will lead to a repeat of the free and easy spending that caused the debt to accumulate in the first place. Some of us love our credit cards so much we will simply forgive and forget. And a year or two later, we will be saddled with the same debt as before -- along with the original debt we consolidated.
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