| Dangers of debt consolidation | |
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| Companies offer these rates as
teasers -- enticements for you to switch credit card vendors. Much of the time,
card companies target consumers with better credit, so that may leave someone
struggling with debt without this option.
Even if you do qualify for a zero-percent or similar
single-digit rate, it won't last forever. Make sure you know when it will end
and what the rate is expected to jump to when it does. The
low rate also lasts only if you pay on time. One late payment and the credit card
company will jack up the rate. Also look for hidden fees and charges that can
increase the actual cost of credit. "It's a short-term
fix," says Viale. "The only way it works is if you are really meticulous
about paying it and stay on top of it and then move onto another credit card before
the low interest rate expires." Opening new credit card
accounts every six months, however, could negatively affect your credit rating,
he cautions. And to successfully lower your debt load, you'll
need to pay far more than the smallest amount the card company will accept, especially
after that zero rate disappears. "Paying the minimum for a $20,000 debt won't
cut it," notes Viale. Bankrate's minimum
payment calculator illustrates Viale's assessment. Say, for example, you transferred
$20,000 of other debt to a zero-percent card and paid $1,000 on it by the time
the rate jumped to 14 percent. If you make only the minimum monthly payments,
it will take you 1,134 months -- or 94.5 years -- to erase your remaining $19,000
balance. If you live that long, you'll pay $64,805 in interest. And that's presuming
you don't charge another thing during that time. Debt
consolidation loan
Did the credit card computations scare you into
looking for another option? There's always a debt-consolidation loan. Offers for
these financial products are an e-mail box staple. Chances are you get a dozen
or more everyday suggesting this as the solution to your growing debt problem.
A major appeal of consolidation loans is convenience. Instead
of paying 20 different creditors who are charging different rates at different
times of the month, you take out one big loan and pay off all those accounts.
Then you make a single payment on that loan once a month. But
ease doesn't automatically translate to savings. Before you
sign on the dotted line, be sure that the costs of the new, bundled loan will
truly be less than what you're already paying various creditors. For many consolidation-loan
candidates, their current credit woes mean they won't get the lowest-available
interest rate. Plus, when there is nothing to secure the loan (such as your home),
expect the lender to bump up the rate. Calculate interest and
fees on all your existing accounts to determine the total of the payments you
now make. Then compare those amounts with the consolidation loan numbers to make
sure it truly is a better choice. | 
