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Ask Dr. Don

Consolidating credit card balances

Dear Dr. Don,
Does it pay to take a cash advance on one credit card to pay off two smaller ones? The cards all have the same interest rate.
Barry Balances

Dear Barry,
If they all have the same interest rate, there's no real need to consolidate these balances. Think about it. If you have $2,000 outstanding on two credit cards at 16.9 percent, what's the savings in having the balance on one card at the same interest rate?

Most credit card agreements have higher interest rates for cash advances and will also charge a fee for the transaction, too, so it's not going to be a less-expensive approach to paying down your credit card debt.

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People typically look to debt consolidation to reduce their interest rate or extend the term of the loan. Credit card debt is open-ended or revolving credit, so shifting balances from one card to another isn't going to extend the loan term. You've stated that all of the credit cards are at the same interest rate, so that's not a reason to move balances.

About the only reason for you to consolidate these balances is if one credit card calculated the minimum payment as a lower percentage of the outstanding balance then the other and you were trying to free up some funds in your monthly budget. You're trying to pay things off, so you should be paying more than the minimum payment.

A balance transfer to another credit card at a lower interest rate could help you pay down your balances faster because more of your monthly payment would be going toward principal instead of finance charges.

But the credit card companies are getting pretty sophisticated in putting up barriers so cardholders don't keep moving on to the next teaser rate, so make sure you understand the credit terms and balance transfer charges if you decide to take this approach. Bankrate.com has a feature that can help you decide if moving balances is the right decision for you.

-- Posted: July 12, 2002

Read more Dr. Don columns
See Also
How to avoid headaches and extra fees when transferring balances
Balance-transfer worksheet
Credit card balance-transfer dangers
Financial advice glossary
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