Credit card loans as debt consolidation tools

A growing number of credit card companies are offering debt consolidation loans to their customers in order to entice them to move debts to their card from other cards. Is utilizing your credit card account to combine debt a wise idea?

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Growing numbers of Americans are finding themselves with too much debt that they can not pay off. A good portion of this debt has been borrowed from credit cards. With rising heating fuel and gas prices, along with greater required payments on credit card statements, many, if not most individuals are finding it harder than it used to be to eliminate their outstanding balances. The number of businesses dedicated to offering debt consolidation products is increasing to meet the demand created by by growing debt among Americans.

The credit card industry is a hugely profitable industry, so why not extend it in the direction of "helping" individuals get rid of other bills by offering a debt reduction loan? More and more credit card companies are offering their customers debt consolidation loans and an option to help get out of debt problems. Although the card companies make a little bit of money via the one to two percent fees they charge merchants when a sale is made, most of their revenue derives from the interest payments that they receive from consumers. Why not offer people the opportunity to move large balances from other accounts to the one they offer? Interest rates on many types of loans are fairly low, but for credit cards, the interest tend to be at least much higher.
 

There are several items to ponder if you are considering moving balances from several different cards to a single credit card for debt consolidation reasons:

• Is the rate fixed, or is it a variable rate? Variable rates can change suddenly; you want to be aware of just how much your monthly payments might increase, especially if the amount of cash you are repaying amounts to thousands of dollars.
• What is the penalty, or default interest rate? Credit cards have a penalty rate that can take effect any time you make a late payment. Penalty rates are likely to be prohibitively high; your minimal debt reduction rate might be replaced by a 30% default or penalty interest rate should you make a late payment.
• The company may offer you a favorable interest rate for the "lifetime" of the debt consolidation loan, or they might advertise one that is just short-term. Make sure that you know what the rate is and when, or if, they could adjust it.
• Does this account include a universal default provision? If it does, the default, or penalty rate could apply when and if you make a late payment to anyone. Paying the electric bill late could trigger the penalty rate on your credit card account. This would effectively negate any benefits you might receive from the low consolidation offer.
• Read the contract. Many, if not most credit card agreements state that the business can raise your interest rate at any time, for any reason. The only prerequisite is that they provide you with two weeks' notice. any such offer, even one that is for the "life of the loan" is in essence only in effect as long as the company is OK with it.
• Can you do much better by acquiring a consolidation loan from your bank or credit union? You might get a more reasonable interest rate and one that is permanently set from another lender. Check around first.

These offers may seem appealing, but remember - these products are offered by the lender or creditor for their advantage, not yours. They are marketing these opportunities to you because they think that they will make profit from it.