Balance-transfer debt consolidation
Dear Debt Adviser,
I read not to borrow from one credit card to
pay off another. I have approximately $4,000 on several other cards
and have an empty one that is offering a 5.6 percent for the life
of the loan. Is it OK to get the $4,000 to pay off the other credit
cards (which I intend to close afterward)? That way, I have only
one card, one finance charge and one payment. Smart move or not?
What is the downfall? Thanks for your advice.
Smart move! Maybe.
Several people have written to me asking why I would
advise that borrowing from one card to pay another is bad news.
Let me clarify. What I mean by that is paying one minimum balance,
by increasing the balance on another card. A pyramiding of debt!
What you are proposing is not what I have warned against.
You are asking about the advantages and disadvantages of transferring
balances from several cards perhaps at a high or variable rate to
one credit card with a lower, fixed-interest rate.
Combining your balances on to one credit card is essentially
your own personal consolidation loan. The difference between what
you are doing and a true consolidation loan is that you can add
purchases to the card that you are using to consolidate your balances.
Also watch for balance-transfer fees that may increase your real
cost of consolidation.
The first rule of successfully consolidating your balances
on one card is that you must have the discipline to stop increasing
your debts. The biggest mistake you can make is to continue to charge.
I wouldn't recommend that you close all the accounts that you will
be paying off. If you did, you would have to use the card with the
transferred balances for any purchases you will be paying off in
full each month. Be careful of this, as new purchases are usually
at a higher rate and you pay interest from the day of purchase without
the usual grace period. Also having some open accounts will help
My suggestion that you not charge anything you can't
pay off in a short time also applies to consolidating credit card
balances through a home
equity loan. You must be very careful of any additions to outstanding
balances or you will end up in the same, if not a worse, boat --
one with a big money leak.
The second disadvantage is the fact that, unlike a
home equity loan, your credit card company has the right to change
the terms of your current agreement under certain circumstances.
Your 5.6 percent interest rate could get hiked up to 25 percent
or more if you miss even one payment, and you would have no choice
but to pay the higher interest charges.
The most obvious advantage to consolidating your credit card
balances is to save money. Your $4,000 in balances on several cards
could be costing you as much as $65 a month in interest charges.
However, the charges per month on the credit card with 5.6 APR would
be approximately $18. Bankrate has a calculator
that lets you figure out the real cost of any credit card debt.
Another advantage to your plan of consolidating balances
is that you can pay off what you owe faster and save a bundle. Here's
some fun with numbers: If you pay a 2 percent ($80) minimum payment
on $4,000 at 18 percent you will pay $10,931 in interest over 508
months. If you pay the minimum payment with a 5.9 percent interest
rate you will pay off the debt in 195 months with interest of $1,216.
But my favorite is to continue to pay the $80 minimum at 5.9 percent
interest and you will be done in 58 months for an interest charge
of only $602. See the Bankrate "True
cost of paying the minimum" calculator and do some figuring
Diana, it sounds as if you have the discipline to
make your plan work and now you know the real costs of paying now
or paying later. Good luck and remember: No charging!
The Debt Adviser, Steve Bucci, is the president
of Consumer Credit Counseling Service of Southern New England. Visit
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advice or click
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