If credit cards have become a way of life for you, it might be time to
organize your debts. 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 thousands in interest charges. Be careful, done incorrectly, canceling and consolidating credit card debt can harm your credit significantly.
Before you consolidate, first you need to recognize why you want to consolidate. Are you in need of lowering interest rates? Does your budget require 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 of consolidation programs and focus your efforts towards debt settlement.
If you really just want to get out of debt, you need to understand how you got into the mess. Then you need to be proactive in fixing the mess.
Simply solving the problem with debt consolidation often makes the problem worse. Too many people consolidate and then charge their 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. What are your current available limits? 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 those accounts. 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 for isn't really 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 for unforeseen expenses.
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 and highest available limit. You can't use this card or the other cards until it is paid off in full.
Now you need to have one or two cards that have high enough available limits to cover your charging needs. Make sure that they have the lowest interest rates you can find. This will save you the most substantial amount of money. These should be the only accounts you have open.
IF you charge to them, make sure you pay off each balance you charged in full every month.
When it comes to balance transfers, there are some questions you should definitely have answers to. Find out how long the transfer rate lasts. Sometimes you can be given a rate for balance transfers that only last for a couple of months. Find out if the rate is just for balance transfers, or is it for transfers and new purchases? Most agreements state the lower rate is only for the transfer and any new charges will accrue interest at a much higher rate.
You need to find out about the fees or finance charges that may 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! Ouch!
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