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4) Thinking of Consolidating Credit Card Debt?

Promises and Best Options

Are you carrying balances on high interest rate credit cards? Are you tempted to move that debt by enticing credit card offers? 0% percent for 6 months! 2.9% till August 2008! No fee for balance transfers!

Such enticing “promises” come from your existing credit card accounts and from new credit card offers. In many cases consolidating credit card debt may make sense, but credit card offers like these often have many consumer traps lurking within the tiny print of the agreement.

  • The disappearing low rate: many credit card companies have a “universal default policy” which allows them to increase the interest rate—double, or even triple it—if you (the cardholder) are late making a payment to any creditor, even if you paid their credit card bill on time. Some credit card companies may also raise the rate if they believe you have taken on too much debt.
  • Minimum finance charge: annual fees are being replaced by many credit card companies by a minimum monthly finance fee of $2 to $6. This fee is charged even if you pay your balance in full. Thus you are paying a monthly fee instead of an annual fee.
  • Quick trigger late fees: most card companies no longer offer grace periods for late payments. If the payment arrives even a day late, a late fee is charged. The typical fee these days ranges from $15 to $39. Some companies are even time-stamping payments—the statement says the payment is due on a certain date; the fine print says it has to arrive by a specific time, usually noon or 1 p.m. on that day. If your payment arrives on the due date but in the 3 p.m. afternoon mail delivery, let’s say, that’s too bad—you’ll be charged that $39 late fee. Late fees and other penalties now account for a sizable portion of credit card company profits.

    Another trap that can cause a late fee is not sending your payment in the card issuer’s preprinted envelope. These payments may be posted five days after they are received.
  • Reduced payment due period: many card companies have also reduced the payment due period from 31 days after the statement date to 20 to 25 days. There's nothing wrong with this, but a consumer needs to be aware of the shorter time to return payment on time. If, for example, a card company has a 20 day payment period from billing date, and the statement takes seven days from billing date to arrive in your mailbox, then you must return your payment within 13 days of receipt to avoid the late fees and possibly trigger a higher interest rate on the account. Triggering those fees is where the real danger lies.
  • Punishing penalty APRs after a late payment. If you pay after the due date by even a day or two, some card companies then increase the interest rate on the account dramatically. Miss the due date once and your rate may skyrocket to 19.8%, for example; miss it twice with this same company and the rate goes to 28.49%. That increased rate is your new rate from that point on. In addition, the company adds fees such as $29 or $39 for each late payment.
  • Lower interest rate balances are paid off first: if the balance on the card was accumulated at different times—for example, a balance transfer at a 4% intro rate, new purchases at 15% and a cash advance at 19%—the card issuer applies your payment first to its fees and the lower interest balances. You continue to rack up interest on the higher rate balances.
  • The disappearing grace period for interest accrual: the big print may say that the card offers a 25-day grace period on new purchases before interest starts to accrue. The small print says that if the card carries a balance (if you don’t pay it totally off every time), then interest on any new purchases or balance transfers, etc., starts accruing from the date of the purchase or transaction.
  • Terms can change at any time: many terms of agreement (that multi-page tiny print document that comes in your statement periodically) have this statement: “We reserve the right to change the terms at any time for any reason.” It usually goes on to say that the changes will affect the current balance and that further use of the card implies acceptance. Of course, the text in these announcements is so small and dense, it’s often hard to tell just what is changing.

When it Makes Sense to Consolidate Credit Card Debt, Your Credit Union Can Help.

For many consumers, credit card debt is usually the most expensive debt they have. Many of us have fallen into what is called the “plastic habit”—you know, buy now on plastic and pay later. And later. . .and later . . .and later, as the interest piles up.

Financial planning experts advise that one of the smartest things individuals can do is to pay off credit card debt and then use credit cards wisely. Consolidating debt or transferring high interest credit debt on a single card to another type loan can make sense if:

  • You are carrying a lot of debt on one high interest card
  • You have multiple balances on several cards
  • The interest rates on your card or cards are high
  • You find yourself making only minimum payments on your cards
  • You are having trouble making even minimum payments

In these cases, your credit union can help. Instead of shopping around for another low interest credit card—one that may have some of the consumer traps just discussed—visit your credit union's website instead.

A debt consolidation loan from your credit union can be used to pay off your credit card debt for a lower monthly payment. In some cases, a home equity loan may be a good solution. These loans are usually offered at a fixed rate that is lower than most credit card rates. Plus, you avoid the credit card loan traps.

Because as a member you’re an owner of your credit union, their first goal is to provide choices and help you make financial decisions that work to your advantage. So before you bite on the latest “low rate” or “great balance transfer” offer that arrives in the mail, do your homework: Take a look at your total credit card debt and its terms then compare it to options at your credit union.

A closing Information Edge Tip: Remember, your purpose in consolidating credit card debt is to get rid of it. Resist the temptation to run up new big balances on your cards. Experts recommend using your best interest-rate card wisely, paying off the balance promptly, and putting the rest away (or cutting them up).

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