 Avoid
variable-rate debt consolidation loan
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 Dear
Debt Adviser,
One of my credit card companies has a debt consolidation loan that
would allow me to pay off my credit cards in five years at a variable
rate of 7.24 percent. As the minimum payments on a couple of my
credit cards have jumped to a level such that it is now a struggle
to come up with the extra cash, I am definitely considering this
offer. Is this a good idea?
-- Laura
 Dear
Laura,
You will be well-served to look at this offer
from all sides before you accept it.
Here are three key items to consider:
1. The interest rate is variable.
The term "variable rate" should scare the pants
off you when it comes to a loan and you are in a position of having
trouble making all of your payments. Remember, the credit card company
is providing you with a service that, at first glance, looks like
a lifesaver; however they are in business to make money and the
ability to change your interest rate (with the word "variable")
is one of the ways they can and likely will. Further, variable rates
are tied to the prime
rate and it has been steadily
rising and may also make your rate upwardly mobile. I recommend
taking a closer look at the offer. What I believe you will find
is language in the loan agreement that states the creditor can change
the credit terms at its discretion.
2. You are having trouble with
your current minimums. You are having trouble repaying a
loan that likely is already amortized over eight to 10 years. The
minimum
payment rules changed at the beginning of 2006 requiring that
a minimum payment has to cover interest, fees and allow you to pay
off the loan in a reasonable amount of time. The bank decides what
is reasonable, and it is usually between eight to 10 years. If you
go to a five-year repayment period, your monthly principal amount
will have to increase. A temporarily lower interest rate may make
the payment lower, but that may change with the variable interest
rate. The five-year term will not.
3. Is there a penalty-rate clause
in the terms? Check out the fine print relating to universal-default
terms and the penalty rate on this card. Some cards use a universal-default
provision that says if you are ever late on any obligation, even
to another lender, the company can charge you a penalty rate. Some
can even do it if your credit score deteriorates but you are never
late. Penalty rates vary by card issuer, but as of this writing,
some large issuers, including Citibank, Chase and Bank of America,
charge 31.5 percent! Add that to a five-year repayment scheme, and
you will be wondering what hit you.
Still, if the offer checks out, it may be a good one
to consider. A last suggestion is to go to your local bank or credit
union, bring the offer and see what they will do for you. You may
be surprised at the result.
I don't want you to be put in the position of believing
that you have your debt under control with the debt-consolidation
loan and then have the rug pulled out from under you, if your creditor
increases your interest rate and your monthly payment increases
to an amount you cannot afford. I encourage you to explore all your
options before consolidating your debt with this or any creditor's
offer.
Whatever you decide to do, stop charging and examine
your monthly spending to make sure you are not overspending on nonessentials.
Good luck!
The Debt Adviser, Steve Bucci, is the president
of Money Management International Financial Education Foundation
and the author of Credit
Repair Kit for Dummies. Visit MMI
for additional debt advice or to ask a question of the Debt Adviser
go to the "Ask the
Experts" page to ask a debt question.
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