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The danger of spreading out
credit card debt
Dear Money Matters,
Is it better to transfer all credit card debt to one low-rate credit
card or keep it on several low-rate cards?
Justine
Dear Justine,
Yours is an intriguing question, particularly these days when offers
for low-interest credit cards are virtually everywhere you turn.
However, no matter how tempting or accessible, it's generally best
to limit your cards as much as possible.
The answer is certainly no from a purely organizational
standpoint. For one thing, if you spread out a significant amount
of debt over several credit cards, that mandates much more attention
on your part to make certain you pay every one, every month and
on time. Moreover, as you're probably aware, all credit cards with
low "teaser" rates only hold those bargain interest costs
for so long -- check out Bankrate's lowest
starting credit card page, and you'll see that the longest a
teaser will likely stick around is six months. After that, they
spike up, often significantly (several cards, in fact, soar to roughly
24 percent interest). Again, that puts the onus on you -- if you
fail to pay off any card before the teaser rate heads south, you
may be staring a credit monster square in the face.
Additionally, going with several credit cards to tackle
a significant chunk of debt really has no impact on your month-to-month
payment obligations. Break it down -- putting $3,000 of debt on
three zero-interest teaser cards that last six months means three
monthly payments of $167 if you want to pay off the bill before
the interest jumps. Stick the same $3,000 bill on one card and your
monthly payment is $501 -- almost the same total obligation down
to the penny. And, again, you only have to look after one payment
(and one monthly stamp and one envelope) rather than three.
The final potential snarl to spreading debt among
several low-rate teasers is what can happen after -- heaven willing
-- you've paid off the entire debt. Although it's always in your
best interest to cancel cards you no longer need, far too often
we simply forget that we have operable credit cards around. Not
only can that result in a surprise annual charge for a card you've
ignored for months, it can also affect your credit score. Credit
parameters suggest that Americans on average have five bank cards
-- anything greater than that can lower your credit score because
it suggests you may be juggling more debt than you can reasonably
manage. And that can derive from credit cards that are used and
forgotten, even if you've not charged a dime on them.
However, opting for one credit card doesn't mitigate
the importance of paying down your debt as quickly as possible.
No matter if it's one teaser card or five, the second that the low
intro rate wilts into oblivion, you're running up potentially exorbitant
charges.
The only foreseeable scenario I can think of that
supports more than one credit card is an unusually large amount
of debt that one card simply cannot accommodate. If that's the case,
multiple cards may be unavoidable, but be prepared to pay down your
debt as quickly and aggressively as possible, since you don't want
to run the risk of carrying a large balance on a card or cards that
jump into the high double digits in interest charges.
-- Posted: July 15, 2002
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