People once thought fondly of credit cards as their flexible friends. Credit cards were seen to represent an opportunity to buy today and pay tomorrow. The security provided by credit cards was comforting in that they often eliminated the need to withdraw and carry large amounts of cash. The credit card trap as it has frequently become known was lovingly embraced, with scarcely a thought for the future and the pitfalls it could hold. The potential consequences of these perceptions and attitudes mean that consolidating credit cards in the form of other types of lending could in the here and now prove significantly beneficial to a great many people.
Credit card debt mechanics
When you spend money on your credit card, you will receive a statement the following month advising you of the amount outstanding and the minimum amount you are required to pay towards your debt by a stipulated date. If you pay less than the full amount outstanding, you will be charge interest on the remainder which will be added to the total of your debt. Where you are only paying the minimum amount each month but continuing to use your card, your debt can very easily rise substantially in real terms, as your payments represent only the interest and a very small percentage of the serviceable debt capital.
Credit card promotions
One of the ways in which credit card providers will try to tempt you to take out their card is by offering zero percent interest on balance transfers and/or purchases for a fixed period of time. What they don’t often make clear is that when you are making payments every month, your payments will firstly be appropriated to the interest free element of the debt. This means that the interest bearing debt you are accumulating – together with the compounding interest itself – remains outstanding in its entirety until the interest free element of the debt has been cleared. This system can in the long term very often offset completely the benefits to be had from obtaining any such deal.
Credit card interest rates
The interest rates charged on credit cards is on average considerably higher than the rate you will pay on an unsecured personal loan and substantially higher than the rate you will pay on a secured debt or mortgage. It is also usually variable where a personal loan rate is more likely to be fixed and budget friendly. This means that borrowing the same amount of money on a credit card rather than in the form of a personal loan can cost several times as much over the same or even a shorter period.
Multiple credit cards
Where you have more than one credit card, the difference between what you are repaying cumulatively and one, fixed payment to a personal loan can in extreme instances represent hundreds of dollars each and every month. This is due both to the higher interest rates charged and the aggregated minimum percentage payment amounts. This is a lose/lose situation as you are not only paying out significantly more each month but significantly more in total over the longer term.
Consolidating credit card debt
The easiest way to consolidate credit card debt is to take out a personal loan for your total amounts outstanding. You will need to request a settlement figure from each credit card provider as of a stipulated date. A loan application will then need to be made for this amount. Where the loan is approved, the funds are used to repay the credit cards and ideally close the accounts to eliminate the temptation of re-establishing the debt levels at a later time.
Conclusion
Consolidating credit card debt – where it has been allowed to mount up to even semi-significant levels – can clearly be seen to potentially save you money in both the long term and the short. It can also help to prevent long term debt repayment difficulties and all the associated stress and credit rating problems. Where you are considering credit card consolidation, remember it costs nothing but a little time to make the necessary enquiries and find out to what extent you personally could benefit.