Organize credit card debt

If your wallet is full of plastic and your mail is full of bills, it might be time to organize your credit cards. In fact, if you are carrying quite a bit of debt, consolidating to a balance transfer credit card or a credit card with zero interest can save you a hefty chunk of change in interest charges. But done incorrectly, canceling credit cards or consolidating debt can cause more harm than good.

Do you need to consolidate?

Decide what you want to achieve with consolidation. Do you want to lower your interest rates? Do you want to lower your monthly payments? Or just stretch out the terms on your loans? If it’s one of the last two, tread carefully.

“If you really want a get-out-of-debt-free card, you’ve got to understand how you got into the mess and fix the mess,” says Wayne Bogosian, co-author of ” The Complete Idiot’s Guide to 401(k) Plans.”

“People solving symptoms with debt consolidation are on the verge of making the problem worse,” he says.

In short, don’t consolidate your credit cards just to charge them all back up again.

Which cards to keep?

If you do decide it’s time to reduce the number of cards you have, you should determine your credit needs. How you are using your cards will determine whether it makes sense to consolidate the balances.

Do you have multiple department store or gas cards that you never use? Are you paying a yearly fee for a credit card that allows you to earn miles? If so, do you plan to use those miles? Consider how many points you earn and if it’s worth the fee you pay.

Follow these steps

Ultimately most people really need only two or three multipurpose credit cards. To consolidate your balances onto fewer cards:

  • Pay off any low-balance cards you will not be keeping, and then close the accounts.
  • Transfer the remaining balances to the card with the best interest rate. Don’t use this card until it’s paid off. This will avoid additional interest charges on revolving purchases. Once the balance is paid, close the account.
  • Choose the two or three cards you are going to keep, and be sure they have limits high enough to cover your monthly charges. Close the others, and be sure to pay these off in full each month.

How to transfer a balance

Before you transfer that hefty credit card balance, read the fine print on your credit card agreement and ask questions. Otherwise, you could end up paying fees and a much higher interest rate than you expected. Many of the answers to these questions can be found on your credit card statement. If you cannot find the answers to these questions, call your credit card company and request a copy of your credit card agreement.

Ask these questions

  1. How long does the current rate last?
  2. Does the current rate apply to transferred balances or new purchases or both?
  3. Does the card have an annual fee?
  4. What about late fees and over-the-limit fees?
  5. Are there balance-transfer fees? (Some issuers charge transaction fees as high as 4 percent. So the higher that balance, the higher the transaction fee. A 4 percent fee on a $5,000 balance would cost $200.)

Read through the credit card statement a few times. A lot of the information is hard to decipher. For example, some offers waive fees for “initial balance transfers” only. These are the transfers that are authorized when the customer first accepts the card and completes the balance-transfer form.

In such cases, every other balance transfer is treated as a cash advance and is subject to cash advance fees. Cash advances are VERY expensive.

Once comfortable with the terms of the offer, be sure to fill out the balance-transfer form carefully. Incomplete information may halt or delay a transfer.

It’s also a good idea to make the minimum payment on the old card while waiting for the balance transfer to take effect; that may take anywhere from two to four weeks. The last thing a person who is trying to minimize their credit card costs needs is a $29 late fee and a penalty rate.

Your credit card company may send a notice saying the balance transfer is complete. Be sure to call the old card company and verify this. Write down the name of the person you talked to, the date, the time and what was said.

To avoid any mix-ups, experts urge people to wait until the old credit card company sends them a billing statement with a zero balance. If the company doesn’t send one, request it.

Then cancel the old card. You don’t need it.

Dangers of consolidating credit card debt

Consolidating credit card debt is not without danger. The most immediate dangers have to do with how well you manage to make the transfers.

Watch out for these costly errors

  • This could cause your rate on the card to shoot up, costing you quite a bit in interest rate charges. In fact, don’t even let a card issuer know that you’re thinking of leaving until you’ve paid off the balance. Some issuers will jack up your interest rate if you try to cancel while you have a balance.
  • Not finding out the rate and fees for balance transfers.
  • Not paying the minimum on all your cards until the transfers are officially complete. If you don’t pay on one card, that nice rate on your other card could disappear — and you will have transferred without saving a dime.
  • Not paying all your cards on time. You should realize that it may only take one slip-up for a super-low rate to disappear. One late payment can result in a 9.9 percent rate to jump to a 21.9 percent rate.
  • Canceling cards before you apply for a mortgage or car loan. This could actually worsen your chances of getting favorable terms. Credit-scoring models look at a number of factors when calculating your score, including the result of the following formula: The total amount of debt on credit cards and revolving accounts divided by the total amount of debt available on those accounts. This formula results in a fraction less than one. The lower the fraction the better. This means that you might want to wait until after you have received the loan to cancel your cards.

Perhaps most importantly, you need to remember that the debt, even at better terms, is still there. And you still have to be diligent about paying it off before you add to it.

In other words, remember that consolidating your debt doesn’t mean you are free to charge up your remaining credit cards. If you truly want to get out of debt, use this as an opportunity to put all your credit card debt in one place, concentrate on paying it off and get rid of credit cards you don’t need.

Tips for getting out of debt

  • Put all your credit card debt in one place
  • Concentrate on paying it off
  • Get rid of credit cards you don’t need

Steve Bucci, Dana Dratch and Amy Fleitas contributed to this story.