Debt consolidation credit cards are credit cards on which you can put all your previous debts together into one larger debt. They can be beneficial for helping you manage and pay off large debts, as long as you choose the debt consolidation credit card wisely.
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As helpful as debt consolidation credit cards may be, they also come with several caveats.
Unscrupulous companies can prey on people who are deeply in debt and feed them false promises of instant relief, according to the FDIC.
What should I look for in a debt consolidation credit card?
One of the most important factors to look for in a debt consolidation credit card is a low interest rate.
While that factor is important for all credit cards in general, it is especially dire to have a low interest rate if you are transferring all your debts into one major debt. A major debt can easily rack up high interest rates due to the high amount of money owed.
The annual percentage rate, or APR, is a major factor for debt consolidation credit cards, and credit cards generally have different APRs for different transaction types, the Federal Reserve explains.
The APR that may concern you the most is the APR charged for a credit card balance transfer. Since you will be transferring all your debts onto a single credit card, you want to make sure the balance transfer APR is reasonable. Debt consolidation credit cards may also charge a fee for balance transfers, usually a percentage of the amount you are transferring.
A major perk for a debt consolidation credit card is finding one that charges a low fee or no fee for balance transfers, which can be offered as a competitive way for one company to get you to choose its credit card over another company’s credit card.
The purchase APR denotes the interest you’ll pay on purchases, which is not as high a concern with debt consolidation credit cards since the credit card may not be used for purchases very often, if at all. Other APRs that do matter include the introductory APR and the penalty APR.
Keep a sharp eye out for very low introductory APRs that may expire after six months and turn into a high interest rate. Unless you are planning to pay off your debts during the low rate of the introductory period, higher rates can also make your consolidated debt mount rather quickly. The penalty APR can also be high, as can penalty fees. Penalties that may cost you additional money include not paying off the minimum payment due, making late payments or sending in a check that bounces.
How do debt consolidation credit cards calculate the interest rate?
One more factor to note is how the annual percentage rate is calculated. A fixed credit card APR is one that stays at a fixed amount for a specified period of time. The Federal Reserve reports if no amount is specified in your debt consolidation credit card agreement, the percentage rate must remain the same for the entire length of the agreement, or as long as you hold that particular credit card.
A variable credit card APR is one that changes regularly, with the frequency of the changes outlined in your credit card agreement. Variable rates are based on an index, with two common indexes being the Treasury bill rate or the prime rate. Your debt consolidation credit card can also use a combination of variable and fixed APRs depending on the type of transaction.
What are some caveats when choosing a debt consolidation credit card?
A debt consolidation credit card has the power to consolidate credit cards to one card. That’s it. It pays to be wary of any credit card company or debt consolidation program that promises things it cannot deliver, warns the FDIC. Promises may include having a quick fix to your debt or credit problems or even totally clear bad credit history. Paying off debt takes time and bad credit histories cannot be magically erased. Also, be very wary of companies that promise to do this for a fee, especially if they are demanding the fee before you even begin working with them.
You may face a legitimate application fee for applying for any new credit card, whether it’s a debt consolidation card or otherwise, but you may want to steer clear of anything labeled as advanced fees that may come with ridiculous promises. Although bad credit histories and major debt cannot be erased overnight, they may be successfully managed and repaired with budgeting, planning, and the slow and steady pay-off outstanding balances due with tools such as a debt consolidation credit card.
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