Credit Card FAQ

Should I Consolidate My Credit Card Debt?

22 January 2013 by CreditCardsCo™

Debt consolidation is a bit of a buzzword these days, with many people considering it as a way to save money on debt that they have. While it is a good idea in theory, it will only benefit you if you truly understand what it entails and how you can use the system to your advantage.

Consolidating your credit cards might seem like a good idea on paper, but you have to look at the big picture in order to understand if and how it can benefit you. Although the offers you might receive in the mail seem like good ideas, there are many things you should consider before jumping in.

Everyone wants to save money, but it's not always that easy. Even during a good economy it is not always easy to make cutbacks and take advantage of solid investments. Many people consider things like debt consolidation to help ease the burden.

Although you may hear about debt or credit card consolidation everywhere you go, that does not necessarily mean that it is the right option for you. Yes, it can help you, but only if you truly understand how credit card consolidation programs work.

Balance Transfer Credit Cards

Many people get offers for new credit cards with low balance transfer rates. These are very attractive for financial customers who have a few high-limit credit cards because it means that you can potentially lower the amount of money you have to pay every month. Indeed, consolidating your credit cards can benefit you by:

  • Lowering the number of payments you have to make
  • Lowering the interest rate you are charged
  • Lowering the amount you must make in payments every month

While this seems like a good idea, balance transfer credit cards can also come back to hurt you because of:

  • Balance transfer fees: a percentage charged against the total amount of money transferred
  • Introductory rates that expire and then drastically increase
  • It can increase your credit liability

Balance Transfer Fees

If you have a high amount of debt and you want to transfer your balances to one card, you could end up paying a great deal of money in balance transfer fees. Again, while you save money on interest rates, the margin of savings begins to diminish the higher the total balance is because of the fees.

Introductory Rates

Yes, you can save a lot of money by transferring your existing balances to a new card, at least up front. However, you need to make sure that you pay off your transferred balances before the introductory rate expires if you really want to save money, otherwise, the variable rate could cost you everything that you saved.

Increased Credit Liability

This is the one aspect of balance transfer cards that many people overlook. When you consolidate your balances, you can actually hurt your credit score. For example, if you have three credit cards with the following balances and limits:

  • $500 / $1000
  • $200 / $500
  • $800 / $1000

Your total credit liability is $1500 / $2500, which means you have $1000 in available credit. If you consolidate the $1500 to a new card, the total credit limit could be lower, like $2000, $1750, or even $1500, which means you will maxed out your credit limit. This, in turn, increases your credit liability and negatively affects your credit score (and you haven't made any new charges)

Conclusion

In theory, credit card consolidation is a good idea, but it only works if you know how to use it to your advantage. You need to understand fee and rate schedules and have a solid plan that will improve over time.

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