Credit card debt is probably the most well-known type of debt aside from mortgage and car loan debt. Credit cards are an essential part of the economy. Consumers use them for both personal and business expenditures.
Unfortunately, using credit cards irresponsibly is the quickest way to get into trouble with creditors yet devised. The total amount of outstanding credit card debt in the United States was in excess of $2.4 trillion in 2010. Dividing that number by the total number of people in the United States works out to approximately $9,000 for every person.
This large amount is probably smaller now in 2011. Consumers have been paying down the debt they racked up during the last boom from 2003 to 2007. People overwhelmed by their debt loads have been eagerly seeking out methods of paying off creditors. Plenty of debtors have been forced to file for bankruptcy. Others have sought out credit card debt consolidation for help. Consolidating credit card debt by transferring outstanding balances to the card with the lowest interest rate is a well-known method of restructuring the total debt load. It is a way to avoid debt consolidation loans while still responsibly handling debt.
Is It Necessary?
Credit card debt consolidation may not even be necessary if the interest rates on each card are relatively the same. This strategy only makes sense if there are significant differences between interest rates. Plus, there are several shortfalls to consider.
Credit Limits
Credit cards have limits as to how much debt a consumer can charge on it. This can hinder a debtor’s plans when transferring large balances. The lower the credit rating is to begin with, the lower the credit limit. The solution is to find the cards with the lowest interest rates instead of one card. Transfer the balances to these cards and cancel the rest.
Penalties And Fees For Balance Transfers
Plenty of credit cards carry fees and penalties for transferring balances. Sometimes these can be so great they effectively cancel out the benefit of a lower interest rate. Choose the credit card with little or no balance transfer fees when seeking credit card debt consolidation.
Advantages
The biggest advantage is more of the monthly payment goes to paying down the principal instead of interest. Having fewer credit cards increases the speed at which the debt is paid off. For best results, find a quality balance transfer credit card. These cards are specifically designed for customers seeking to transfer their balances. Generally speaking, they tend to have lower interest rates, but the downside is they may be unavailable for people with below-par credit ratings.
Conclusion
Credit card debt consolidation only works under a specific set of circumstances. Other types of debt consolidation, like debt consolidation loans, can be traps that entice the consumer into more unserviceable debts. In the industry, this is known as “reloading”. Consolidating credit card debt will work best if the borrower takes meaningful steps to turn his situation around and repair his credit.
About the author: Richard Towler is the co-founder of Secured Credit Cards 4U, a new credit card comparison website for US based consumers to find secured credit cards to rebuild their credit as well as other non-secured credit cards for those with improved credit scores.