Repaying multiple credit card debts or loans can be a hassle for anyone that is not a professional accountant, but many tend to underestimate the challenges associated with balancing ongoing monthly bills and several debts that are accumulating interest at increasingly high rate. Because most cardholders are subjected to penalty interest rates after a late or missed payment, it is not uncommon for one to have two or more credit cards with outstanding debts that carry an APR of 20% or more. The key to escaping debt quickly, with a minimal amount of interest paid, is to consolidate the debts to centralize and simplify monthly repayments.
Using Balance Transfer Credit Cards
The best way to consolidate the balances of several credit cards to a single account is to utilize the benefits of a balance transfer credit card. Balance transfer cards are called so because they do not carry balance transfer fees, which can range from 2 to 5% of the total transaction amount each time a balance transfer is conducted. In addition, balance transfer credit cards often have 0% APR introductory periods, allowing the cardholder to begin making repayments towards their newly transferred balances without any interest charged. If you can manage to repay all of the transferred debts before the introductory rate expires, you may be able to avoid all future interest. Keep in mind that it may be difficult to receive approval for an ideal balance transfer credit card after your credit score has already been damaged, so it would be ideal if you already had an open balance transfer account to use.
Using Standard Credit Accounts
If you’re unable to obtain approval for a balance transfer credit card, it may still be beneficial to use standard credit account, depending on the cost of the balance transfer fees and how much interest could be saved,. For example – If you currently owe $600 on a credit card that is being charged 20% interest, and you have another credit card account that is currently incurring the introductory rate, yet has balance transfer fees of 2% of the transaction amount, it would still be advantageous to transfer the balance and consolidate the debt. On the other hand, if the card that is being charged 20% APR only has an outstanding balance of $300, and the balance transfer fee is 5% of the transaction amount per transaction, then it would not be beneficial to conduct the transfer. As a rule of thumb, as long as the account that is being used to centralize the debts carries a lower interest rate than all of the other accounts and does not have exuberant balance transfer fees, then it may be advisable to consolidate debts using that account.
Using Loans with Lower Interest Rates
In rare cases, it may be possible to obtain approval for a loan that carries lower interest rates than one or more of your current outstanding credit accounts. Unfortunately, once the credit score has been damaged it is often difficult, if not impossible, to find a lender that will approve you for a loan that has better terms and conditions than the credit cards that you are currently trying to repay. If you’re interested in using loans to consolidate credit card debts, it would be best to avoid those that have strict penalties such as payday loans, as these could be detrimental to your debt reduction efforts by causing more debt to accumulate. It may also be possible to find a close friend or family member that is willing to obtain or cosign for a better loan to help you consolidate your debts.
After incurring a significant amount of debt and successfully repaying all of your credit card balances, it can be easy to make the decision to close the accounts in order to avoid future temptation to create new debt. However, closing a credit card account may not always be the best course of action. In fact, closing an account can have variable outcomes on a person’s credit score or credit report, depending on how many accounts they already have, the status of those accounts, and the status of the account being closed. The amount of credit accounts that you have open also has an effect on the debt to credit ratio (utilization rate), as closing an account could decrease your available credit, causing your outstanding debts to become a higher percentage of your overall credit line. Knowing when to close a credit card account when trying to recover from debt can mean the difference between an incredibly slow or fast recovery.
When Closing Account Is Detrimental
It is never beneficial to close a credit account when there is still an outstanding balance, as this would cause immediate harm to the credit score. Once you’ve repaid a credit card account it is important to determine whether your current credit score will allow you to obtain approval for a card that carries more attractive terms and conditions than the card that you just repaid. Many people hastily close credit accounts after repaying them in an effort to avoid future debt, only to find they are unable to be approved for any other credit cards and therefore cannot begin rebuilding their credit as quickly as possible.
When Closing an Account Is Beneficial
If you have multiple credit cards that you’ve just repaid, and several of them are incurring debt with a penalty interest rate applied to the balance on a monthly basis, it is crucial to keep a certain number of accounts open to keep your utilization rate from dropping too low. The utilization rate, also known as the debt credit ratio is the percentage of debt in comparison to your available credit on all of your credit cards. If you have four credit card accounts, and each one has a $1000 spending limit, you have $4000 in available credit. If you still owe $1000 on one of your cards, you currently have a 25% utilization rate (which is underneath the recommended 30%). However, if you close one or two of those accounts your available credit drops causing the utilization rate to rise to levels that are detrimental to your credit score. Thus, it is important to be selective when choosing which credit cards to keep, and try to repay all of the cards before choosing so that you’re not forced into keeping less than ideal accounts open simply to repay them.
Which Accounts Should You Try to Keep Forever
If you had a credit card for several years and have a consistently good payment history with it, but recently failed to make a payment on time or in full, there is no reason to close the account. This is especially true if you have been earning points towards rewards, such as frequent flyer miles, free gasoline, vacations etc. Any credit card that offers benefits, has a relatively low interest rate, and does not charge unfair fees should be kept for as long as possible. Ideally, if you want perfect credit or you want to repair your credit as fast as possible it would be best to never close an account at all and simply keep all of your debts paid.
One of the reasons why we are urged to monitor our credit reports is because of the huge amount of credit card fraud that has been plaguing consumers around the world. Recent research has indicated that banks are among the easiest to infiltrate simply because their automated tellers on the phone require so little information before giving the caller access to your accounts. New technology which rolled out last month is an effort to ensure the identity of the person using the credit card in an effort to prevent fraudulent use of other people’s credit information.
What many people might not understand is that the thief doesn’t actually need to have possession of your card. Yes, there are times when your credit cards are lost or stolen, but credit card fraud is most often the case of someone gaining access to your account number and your personal identifying information such as your address and/or phone number and sometimes even the three digit security code on the back of the card.
New technology is rolling out almost by the day to help prevent identity theft and the newest ‘gadget’ is something called Netswipe which made its debut in August of 2011. There is also a plug in for Word Press that does much the same thing. The principal behind both innovations is that the person ordering online is able to ‘swipe’ their card with a web cam and the merchant is then able to verify that the person ordering a product or service is actually holding the card and entitled to use it. Remember, the bulk of credit card fraud is the result of unsavory characters getting hold of your credit card info but not actually having the card itself.
For the consumer, this is good news because it is another mode of identity protection that can help them keep their credit score in good standing. For merchants, it could be a good thing as well because the cost of such innovations as Netswipe is significantly lower than traditional card swipe systems merchants currently employ. The developer of Netswipe, Daniel Mattes, is going to charge 2.75% for processing fees which in reality is perhaps less than half what most merchants are currently paying.
The bottom line for consumers is the fact that greater care is being taken to protect their identities. There has been so much identity theft over the past couple of decades that many consumers have unsatisfactory credit scores as a result. It will still be necessary to monitor your credit report from each of the three credit scoring companies (TransUnion, Equifax and Experian) because there still isn’t a foolproof way of protecting your identity 100% of the time.
Some consumers choose to order one report every 4 months so that they can have an idea of what is going on with their report throughout the year, but this may present some inherent problems. One thing which many people aren’t aware of is the fact that companies and lenders do not all report to the same agencies. For example, your mortgage holder may report to Experian whereas your credit card company may report to TransUnion and so on.
In order to monitor your credit report throughout the year, it may be better to contract with a credit monitoring company that charges a monthly fee. These companies notify you by email, text message and sometimes even by phone whenever a change is made to any of the reports they are monitoring. If you didn’t make a recent purchase then you can immediately dispute charges before the damage is done. Until such time as a foolproof identity protection system is in place, take the time to monitor your credit report.
Although the process of being approved for a loan varies depending on the lender and their specific credit requirements, most lenders and financial institutions follow the same basic methods to determine the creditworthiness and borrowing eligibility of an applicant. Unfortunately, simply being denied for several loans consecutively can subsequently decrease your chances of obtaining approval for a loan in the near future. This creates a challenging situation because many aspiring borrowers are confused about how they can improve their credit if they cannot even be approved for credit. It is a classic paradox – how can credit be built if credit is not extended?
Utilizing Collateral and Finding Easily Obtainable Lines of Credit
Fortunately, there are some types of credit cards and loans that are granted to people with poor credit, which gives them an opportunity to begin rebuilding their credit if they are able to responsibly make payments on time and in full. However, the defaulting on poor credit loans often results in exuberant penalty interest rates and many credit cards and loans that are offered to subprime borrowers have less than ideal terms and conditions. Nonetheless, it is possible to obtain a secured credit card or loan using collateral and/or a cash deposit. Most secured credit cards require a cash deposit that is equal to the amount of the credit line, and the majority of these cards have credit limits they did not exceed $500. When trying to use a secured credit card to rebuild your credit score is important to ensure that the card issuer files items with at least one of the three main credit reporting agencies – TransUnion, Equifax, and Experian.
Renting Inexpensive Property
There are many rental stores that will allow you to rent inexpensive property such as furniture and electronics regardless of whether you have poor credit or no credit at all. These places usually require some form of proof of employment, so it would be best to bring to check stubs from your current employer. You may also be required to list several references, and the interest rates are typically higher. However, some rental companies will file positive items on your credit report if you’re able to consistently make payments on time and in full. People with poor credit may also be able to to rent a cheaper vehicle that costs anywhere from $500-$4000 with a down payment of $500-$1500, depending on the terms and conditions of the dealer. These types of vehicle rentals are usually offered by companies that handle their own financing. Any type of credit that can be extended to you and will have an impact on your credit report can help you rebuild your credit score.
It is also possible to receive approval for a home or vehicle rental by having someone with good or exceptional credit cosign for you. By cosigning the partner is basically vouching for the applicant’s creditworthiness, while also promising to cover payments in the event that the borrower defaults. It can be difficult to find someone that will trust you enough to cosign for you, as your mistakes could cause their credit score to be damaged if they’re unable to cover your payments. When searching for a cosigner is best to start with family members, spouses, and close friends, as this is a serious financial commitment. When someone cosign for a loan or credit card in a joint application the prospective lender calculates the average credit score of both applicant’s combined. Thus, to people with poor or below average credit could not help each other by cosigning, as it would not raise the average score enough to affect the outcome of the approval process.
Trying to overcome the challenges associated with credit card debt can be a difficult task for anyone, especially if you’re already committed to other financial obligations. As new expenses and bills continue to accumulate, it can become an overwhelming task to make repayments towards existing debts without making late payments towards other bills.
In fact, simply avoiding a declining credit score may seem impossible, let alone attempting to obtain an exceptional credit score. Unfortunately, many people make unnecessary mistakes when rebuilding their credit due to the pressure of having to figure out a way to escape the debt quickly before the interest compounds and the debt increases exponentially. The following are some common credit rebuilding mistakes to avoid.
Applying for New Loans
While applying for a new loan to pay off all of your existing debts simultaneously may seem like an appealing option, it simply creates a new debt, which in many cases accrues interest at a higher rate than the original credit card debt. If you have poor credit it is very likely that you’ll only be able to obtain approval for loans that carry higher interest rates and stricter terms than your current credit agreement.
While the average credit card carries an APR of about 12-18%, bad credit loans like paycheck advances can carry interest rates as high as 30% or more, and are notorious for having overly strict interest rate penalties that are applied after a single late payment. Thus, rather than applying for a new loan and creating a new high-risk debt to pay off your existing debts, it would be advisable to pay off the card balance gradually. For example, if you currently owe a $500 balance on a credit card with an interest rate of 18% APR, you could repay it over 11 months at the cost of approximately $50 per month (with about $45 allocated to interest).
Many people make the mistake of using too much of their available credit, under the presumption that making more purchases and then repaying their balance in full at the end of each month will give them accelerated results. Although it is possible to significantly improve the credit score by consistently using about 30-50% of your credit line and paying off your balance in full each month, using more than half of your available credit for several months consecutively may signify financial desperation from the perception of financial institutions, and therefore often leads to degradation of the credit score.
Instead, it would be better to have 2 or 3 cards, and then utilize approximately 30% of each credit line each month, primarily through smaller purchases, making sure to repay the balance in full and on time every month. By using several cards to conduct smaller individual transactions and never carrying over balances you can safely maximize the number of repaid transactions and expedite the process of rehabilitating the credit score.
Consolidating all of your outstanding credit balances to a single card that has a 0% introductory rate is perhaps the best way to centralize monthly repayments, while also reducing the amount of interest that accrues on your overall debt. However, many credit cards carry exuberant balance transfer fees that can negate the interest saving benefits of transferring balances to the card. It should be noted that it is possible to further damage the credit score by closing too many accounts at once, so it would be advisable to leave a small balance in each account so that they remain active.
Ultimately, determining whether to conduct balance transfers to consolidate the balances of several cards to a single card would have to depend on the rates, terms, and conditions of the balance transfer card.