According to the Federal Reserve’s research published last week, overall American credit card debt increased at an annual rate of 7.5% during the final quarter of last year. This could mean that consumers are feeling more confident about the economy and are willing to take the risk that they will have money in the future to pay off debt. These numbers are seasonally adjusted, too, so it’s not a result of holiday spending.
For any individual or family, increased use of credit cards might cause financial turmoil if debt spirals out of control. Even people who understand the guiding principle of spending less than you earn can fall into a debt trap if they spend what they expect to earn rather than what they have in the bank to cover their debt.
At some point after a period of indiscriminate spending, the monthly minimum payments on total credit card debt could exceed leftover cash flow after paying for the necessities like food and shelter. This might be a good opportunity to consolidate the credit card balances onto one card. This has the benefit of, in many cases, lowering your total monthly minimum payment. Additionally, you might find a way to significantly lower your interest rate. Of course, if you pay less towards your credit cards, it will take longer to get out of debt, but in some cases when cash flow is tight, having the extra income at the end of the month for saving or for meeting all of your ongoing expenses is more important.
In a perfect world, you would be able to transfer all your credit card balances onto one card that has the following features:
- 0% APR for the life of your balance.
- No balance transfer fee.
- A low minimum monthly payment requirement.
The best credit card is going to be difficult to find, and if you do find one that meets these criteria, it may be out of your reach in terms of qualification. The goal is to find the best deal you can, either from within your current cards or by applying for a new 0% balance transfer credit card.
Start by calling the number on the back of each credit card. Explain to the customer service representative that you plan to move balances from your other cards to this card to pay off your debt, and ask for their best deal for balance transfers. You may find that the issuer offers you an unpublished deal. Be sure to ask about introductory APR, length of the introductory term, regular APR for balance transfers after the introductory period expires, balance transfer fee, and monthly minimum payment.
At the same time, while you’re talking to the customer service representative for each card, you might want to take the opportunity to ask for a lower ongoing interest rate on your card. It can’t hurt. It’s easy to ask, and you might get a cost-saving result immediately.
Don’t make the decision on the phone, however. Write down the terms the issuer offers and do the same for all other cards you own. This will help you compare the offers with the published offers from issuers offering balance transfer deals. Once you compile all information, you can make an informed decision about the best card for consolidating your credit card debt.
You may also wish to compare these offers with a loan for consolidation. Many people have had luck asking for a loan on a peer-to-peer lending network like LendingClub and Prosper, but your state may regulate what you are able to receive through these services.
Watch out for companies that offer to consolidate your credit card debt. Many charge an up-front fee and don’t provide any kind of cost savings beyond what you could easily achieve on your own. At worst, some charge an up-front fee and disappear. If you must seek outside help for your debt, go to a well-vetted non-profit organization that will provide advice, not charge you for their services. Even with this in mind, you’ll need to be careful; some companies appear to be non-profit credit counseling agencies until you look very closely.
Once you transfer your balances to a card, don’t use that card for any other spending. It should be dedicated to paying off your balances over time. Also, don’t immediately close your existing credit cards. You can cut them up, leaving one for emergency spending until you build up an emergency fund in the form of a savings account. Closing your credit card accounts might damage your credit score at a time when you might prefer to keep your number as high as possible.
When I first realized I needed to get out of debt and I had balances across several credit cards, this was one the first steps I took in order to get my finances organized, save money, and find a way to get and stay out of debt. What are your suggestions for consolidating your credit card debt?
Published or updated February 16, 2012.