Note From Wil: This is a guest post from Chris Martin, a freelance writer.
I like to include the writings and opinions of as many people as I can. If you want to contribute to Finance For Youth: The Blog, send me an email:
So maybe you’ve seen this little gem in your email inbox before:
Keep More $$$ In Your Pocket!
Spend Money Again Like it is Water!
Get Rich, Popular, And Better-Looking!
WHY WAIT??? DO IT TODAY!!!!!!!!
Okay, so maybe this is a slight exaggeration. But many of these ads do tend to promote consolidation of your credit cards like it’s the best thing since sliced bread, the iPhone, and DVRs combined. But what’s the real story on credit card consolidation? Is there a catch?
Here are some of the catchphrases that are often found in these “Consolidate Now!” emails – and how you should perceive them.
“Compute your credit card debt… and see how much money we can save you!”
This is actually a wise thing to do even if you aren’t actively pursuing credit card consolidation. Gather up your credit card bills, then take a pen and paper and write down the amount you owe and the annual percentage rate on each card. Then add up the dollar amounts to determine your total credit card debt.
The way credit card consolidation works is to take that large sum and create a loan with an interest rate that ideally is near the low end of the APRs you have written down (or perhaps even lower than all of them). If a company can offer that kind of a deal to you, it’s worth considering.
“Manage all of your credit card debt with one easy payment!”
This is actually true. If you find that juggling credit card statements and due dates is a hassle, credit card consolidation can solve that problem for you. You only have to make one payment a month to the company that is holding the loan.
“We negotiate with your creditors to get you the best rate possible!”
That’s pretty much true as well, but you need to understand the ramifications of what this means. Consolidation companies contact the credit card companies on your behalf to negotiate an arrangement. This involves the consolidator agreeing to “pay off the debt” on that credit card in exchange for a reduced payoff amount. The credit card company gets a large sum of money up front, and the consolidator in essence “makes a profit” on the loan.
But what also happens is that the credit card company records the fact that you didn’t pay off the entire amount that you charged on your card. This information gets sent to the credit bureaus, and it often has an adverse effect on your credit score. This could create problems if you’re trying to get a mortgage or another type of bank loan. On the other hand, if you find that making one monthly payment to a consolidator keeps you from paying credit card bills late (or missing payments altogether), then over time this will actually improve your credit score because you are paying your debt amount down.
The fine print.
Of course, there are always a few things that the consolidators won’t want to point out to you. Like the fact that some of their loan arrangements can be “re-priced” after a period of time, which means that nifty interest rate you have could increase after a year or two based on market conditions. There may also be penalties if you try to pay off your loan ahead of time – after all, consolidators make money by charging you interest on unpaid balances, so they want you to carry an unpaid balance for as long as possible. Therefore, take the time to read the fine print in the email (or follow the link provided that lists the terms and conditions) before you sign on the dotted line.
Oh, yeah – one other thing. If you choose to go the credit card debt consolidation route, there’s another thing you’ll have to do in order for it to have its intended effect: stop using your credit cards! (Or at the very least, strongly curtail their use.) If you don’t take this vital step, you’ll just get yourself back into debt and wind up even worse off than you were before you consolidated.
The best strategy is to either “go credit less” and pay for everything with cash, checks, or your debit card; or to maintain one credit card for emergencies and for other necessary tasks (like reserving – but not paying for – a hotel room or rental car, for example). It sounds challenging, but it can be done; many people across the country are living “debt-free” lifestyles.
Credit card consolidation may be the right solution to your credit card debt woes. But in order for this to happen, you have to look beyond the hype that gushes out of consolidators’ solicitous emails. A good rule of thumb is: if a phrase is followed by an exclamation point (or several), be sure to check it out to make sure that it isn’t “too good to be true.”