The other day I received an offer to consolidate credit card debt. The “package” was for $50,000 at 7.99% APR or so I thought! I do not need to consolidate any debt; especially on credit cards… any charges made get paid off each month. Normally, offers this go right into the trashcan, but this time for whatever reason I decided to read the complete offer.

Most people I talk and counsel, never take the time to read the fine print on debt or credit card offers. They head straight to the “sign me up” part to fix their money problem.

Let’s look at the details shall we!

• No Annual Fee
• No application fee
• No collateral required
• No payment for 3 months*
• One predictable monthly payment

The first 3 items come to no big deal. Why? First of all the company already did their work by basically “pre-qualifying” the applicant (me) limiting their credit risk or they would require some type of collateral. No annual fee or application fee shows how generous the company is! If the consolidation loan offer is accepted they will make plenty over time on interest.

No Payment for Three Months

Here’s where reading an offer becomes a requirement. Although NO payments for 90 days – interest on the amount would accrue over the 3 months. Why charge an annual fee or application fee when 90 days covers both.

One Predictable Monthly Payment

This may appeal to some consumers by giving them an opportunity to know up front the amount owed each month on their consolidated debt at what looks like a reasonable APR – 7.99%. However, the details of this financial contract give the company the reserved right to change the APR at their discretion. So much for a predictable payment amount!

Then the kicker:

“if you fail to pay the minimum monthly payment by its Payment Due Date on any two occasions within 12 consecutive months, we may increase your APR up to a Default APR of 27.99%.”

In the beginning what looks like a reasonable offer – just got ugly.

Let’s assume you borrowed the $50,000, 3 months later you lost your job and made payments but late. One day you open the mail finding the interest rate skyrockets to 27.99% APR.

Paying $750 month at 7.99% would take 89 months or 7 years, and 5 months to pay the consolidation loan off. When the rate goes to 27.99% the monthly payment would move to $1340 per month to pay the debt off in the same 89 months.

Over the 89 months $16,316 will be paid at 7.99%. At 27.99% the interest jumps to $68,724 over the life of the debt repayment.

Moral of the story!

Read the fine print, run the numbers and understand completely your financial position before making any financial moves. One stupid signature could place you in deeper debt!

You have more than likely heard of a scenario where a person with a solid job and income is refused a car loan or other type of loan. Just because the person has never had a credit card or had debt recorded with the major credit reporting agencies, they have no credit history.

Very few people can pay cash for a home priced in the current real estate market. Taking out a mortgage is a given for most homebuyers. The dilemma is how a person, with no credit, can establish good credit.

Credit Cardholders in the U.S.

Statistically, data provided from the Federal Reserve and U.S. Census tells us the norm for Americans is to have four credit cards they use regularly. There is also a 15% that carry 10 or more cards. This incredible data is enlightening on the importance of credit cards in our society and financial culture. There is a 24% out there that don’t have any credit cards at all. You have to wonder how they function.

Original Appeal

Not having to carry around cash, which could be stolen, yet allowing consumers to make purchases and protect a consumer of fraudulent purchases, were the most popular incentives credit card companies used in marketing. That is what your debit card from the bank does today. You don’t need a credit card for that. Even with banks giving all of their costumers these two benefits, credit cards have become a part of 76% of Americans’ financial lives.

Internet

The ability to make purchases from all over the world through the World Wide Web
has been an influence on the amount of credit card issued. There are few and far between websites that accept a C.O.D. as payment, but major credit and debit cards can be used all over the web. Having a credit card allows you to find the best deal on your purchases and quite honestly, it is a great feeling. Who doesn’t like to save money?

Single Card Consumer

We are living in an internet and credit card era. That doesn’t mean you have to carry 10 or 15 cards. Having only one card will help you keep up with your debt reality. The credit card market is a lucrative business and card companies advertise with great success the millions of cards available today.

Don’t be fooled into believing your credit cards is disposable income or gives you buying power. That’s what the card providers want you to believe and they have had incredible success. Credit cards lead to additional debt. Buying on credit is a loan of sorts with ridiculously high interest rates, or APR. This type of interest compounds, or adds accumulated interest back to your unpaid balance, so that interest is earned on interest. That doesn’t sound appealing; maybe that’s why they don’t put this in their adds. This reality is becoming more widely spread knowledge among consumers, as it should be. To strengthen their marketing strategy, now they over a variety of incentives, rewards, travel points, discounts, and cash back to entice new cardholders.

Somehow, somewhere along the road, your credit card activity became part of your credit rating report. This leads the consumer to believe not owning a credit card will disqualify them from purchasing a home, or getting a car loan, and those American “needs”? like a flat-screen HDTV in every room of the house including the bathroom. Not having a credit card might take away your right to the “American Dream.”? When you look at it this way it sounds laughable yet at one point or another, most people get sucked into the idea.

We are by nature a culture that strives to keep up with the Jones’. Some fall into a fabricated myth that having more, like with everything, is the best idea so they go out and get every card they are approved for. The Myth: If having one credit card establishes a credit history, 10 cards will help give me a great credit rating. False!

Three Different Views:

Banks

When you go to apply for a bank loan, loan officers with investigate your debt to income ratio. They want to be sure you are faithfully paying off your credit cards and maintaining a zero balance and/or if you are aggressively paying on the debt you have. If you have 20 cards with zero balances, why do you have so many? The bank could be looking a disaster waiting to happen. You could go out the next day and max out your cards. If you do this and they give you the loan, there is no way humanly possible you will be able to make all of your credit card payment and their loan payment, which is ultimately their main concern. They want to know they will be your top priority and that you will consistently make your payments to them..

This won’t hinder the bank from giving you a credit card though. The revenues made on issuing you one their credit cards are outstanding in comparison to the loan you were applying for.

Credit Card Companies

Credit card companies view on debt is “just keep spending.� By carrying a balance, their high interest rates are bringing a sickening amount of money. All they care about is that you pay your minimum payments regularly. How much debt you incur is of no interest to these companies; you are their best customers.

Store Credit

Store credit cards are looking for the same interest profits but their main goal is different. They offer a modest credit limit to secure an occasional consumer makes future purchases at their store. They will likely offer a special discount or coupons in the mail with cash rewards the consumer uses at the store which can make applying for the card alluring. Store credit cards are not worth it in the end. If you must, pay off your total balance every month. These cards have a steep APR on them, sometimes even 25%, which is nuts.

What do lenders want?

They want a person who pays in a timely manner not just one the interest but on the principal as well. That’s where your credit card is a good indicator for a prospective loan to be granted.

Lenders will look at past student, car, furniture, and/or house loans likely on your credit report. This will give the lender an idea of your payment history and how fast you paid that debt off.

The idea that a person’s stable income doesn’t factor into the mind of the lender is absurd. You may have perfect credit, but if you are unemployed or looking for a job, there is no way a bank will give you a loan. It could take months for you to find a job and who is going to make sure you are even looking. Steady income at a job you have worked at for a considerable time, a year or more, does matter.

Tips on How to Improve Your Credit Rating

There is something called a credit to debt ratio. By its definition this ratio is calculated by comparing the total of debt you have to the total credit you have available on revolving accounts. To explain this even further, let’s pretend, by adding up the credit available on all your credit cards you have $12,000 available. You also add up your current debt which totals $2,400. Next you do the math. Divide your available credit into your total debt. The amount then needs be multiplied by 100 to give you a percentage. In this scenario, your debt to credit ratio is 20%. The ideal ratio is 30% all the way up to 50% which is acceptable. Find a great card with a low APR and benefits that suit you and stick with that one card. Over time lenders will be able to view how you’ve made payments.

Maintaining a lower credit to debt ratio may involve balancing your debt on several credit cards. When this ratio is over 50% on one card transfer some of it to one or two lower interest cards that you have a good credit to debt ratio on. This might include getting a new card so you have more credit to add to mix. Make sure to pay off any troublesome accounts. Especially if your going to have your credit report pulled for a loan or large purchase, spreading out debt and adding more credit will improve your credit rating. This may take a month or two to show up on your credit report so don’t procrastinate.

Do your remember the discussion about having too many cards doesn’t improve your credit? Well, when you use the previous strategy taking out too many cards will backfire on you and rate poorly on your credit report. Keep this in mind when employing this strategy and weigh the benefits.

Consolidating

Your credit rating is important but is not the deciding factor for lenders. Guess what? Your credit cards make up only a portion of your credit rating. The last strategy of spreading out debt may improve your overall total debt which is what is really important. Excessive debt though should be consolidated, or combined, onto your lowest interest credit cards. You will be able to use the money you were making on the various minimum payments of your higher interest cards and apply it to one or two low interest cards. This could possibly even allow you to make greater payments than the minimum required and start paying on the principal.

Loan

Because you are looking at improving your credit rate, if you qualify, take out a simple interest, low rate loan to pay off all of your credit debt. You will be paying much less on interest and more on your principal getting yourself debt free sooner.

Wrap-up

By consolidating and eliminating debt, you will most definitely clean up your credit rating. You will also need a good income and to get your finances in order for a loan approval. No credit card can replace these last two factors.

Consumer Credit Counseling Services is the most popular “service” known to consumers facing money problems. Those consumers battling the managing their finances can get help with exploring their options on debt repayment and learn how to create a budget to make their money behave. For many, it is the last choice before filing for bankruptcy.

Does Your Financial Position Qualify?

Too many consumers fall for the quick ads announcing cutting your debt in half by using a service to become their “face” with your creditors. These credit counseling companies can negotiate with creditors for lower interest rates, stopping fees for late payments, reduce the monthly payments and negotiate debt repayment schedules.

However, not everyone qualifies! Remember this is a business even though the label on “Non Profit” is stamped on their advertisement. Often you will need to have over $10,000 in consumer debt to use their credit services.

If you pull the emotional curtain away and step back, the counseling services in the credit industry bring the biggest element to finances that their clients do not and that is organization and discipline. Creditors work with the counseling services because it is in their best interest to do so.

Do not think for a second that their services are free… there will be a cost.

• a monthly fee
• usually a damaged credit score
• Lifestyle changes

You can take all the same steps the credit counseling companies perform all on your own and probably get out of debt quicker with less cost by doing the following:

• Start living on a budget
• Contact your creditors to work out new terms by being upfront with them
• Getting organized
• Staying Focused
• Make Lifestyle changes

I’ve done it and you can too!

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