It happens to
the majority of us, credit card debt
accumulates and before we quite realize it, we are
carrying a debt load that is far
beyond our means. When this happens, we need to take
immediate positive steps to knock down the debt as
quickly as possible. One of the most efficient ways
to do this is to reduce the amount of interest we pay
by shopping around for a better rate and having our
balances transferred over. By doing this, we pay more
towards the principal, thereby reducing the duration
of the loan and saving ourselves potentially
thousands of dollars over the lifetime of the loan.
Typically,
a credit card carrying a balance of $5000 dollars,
with an interest rate of 17.5 % and a minimum monthly
payment of $150 would take you 3 years and 10 months
to pay off. The total interest accrued would amount
to $1, 846. However, if you were to transfer your
credit card debt to a lower interest rate loan of 7
%, that same $5000 paid in increments of $150 a
month, would be paid off in 3 years, 2 months,
substantially reducing the amount of interest to just
$564. That's a savings of $1,282.
There
are several options available for lowering your
interest rates. Each one has its benefits
and drawbacks. By educating yourself, you can choose
the one that is best for you.
Consumer
Credit Counseling Service
Consumer credit
counseling services offers to consolidate your
debts into one payment, negotiating with
creditors on your behalf to have late fees waived,
interest rates lowered and loans extended. Counseling
Services will require a 'donation' or payment to
cover costs and handling fees. You need to weigh
these costs to determine if you would still come out
ahead by paying a company to negotiate a better
interest rate for you; a service that you may be able
to do yourself.
Choose a
reputable firm that will handle the consolidation in
a way that preserves your credit scores. Prior to the
consolidation, due dates should be changed to
correspond with the counseling service's payment
schedule, since many counseling services only send
out checks twice a month, on the 1st and the 15th. If
these dates do not harmonize with the due dates on
the cards, they will show up as late payments on your
report. In addition, it's important to realize that
you need to proceed with caution with these companies
because not all are reputable and many remain
unregulated. Watch for the following signs that may
mislead you into trusting a company you shouldn't:
understand the term "non-profit." It does
not necessarily mean the company is legitimate or
that you will get a better rate. The laws governing a
'non profit' organization are vague. Many companies
qualify for this title by arranging finances to
indicate that the company has not profited, while
paying their employees large salaries. To find out if
a CCCS is legitimate, check with the National
Foundation for Consumer Credit (NFCC) and the Better
Business Bureau in your area. Be wary of companies
claiming you can lower your monthly payments-this is
a fallacy. As of March 25th 2004 the last two banks
to accept lower payments discontinued this practice.
Question companies that offer lower interest rates
than their competitors. All creditors work off the
same interest rate reductions and minimum percentage
payments on balances so therefore it is highly
unlikely to have this lowered. Be familiar with the
current interest rates on the cards you carry and ask
that you choose which cards to consolidate. You
already may carry balances with interest rates that
are lower than the one they are offering you. If so,
request that you be able to exclude those balances
from consolidation.
You have to
decide if there is a benefit to going to a Consumer
Credit Counseling Service or if you can do their job
just as effectively yourself. A consumer can often
negotiate with creditors themselves for a better
interest rate. One option is to shop around for a
better interest on credit cards and to transfer the
balances from the high cards over to the lower card.
Contact your credit card company and tell them you
have been offered a better rate at another company
and if they plan on matching or beating that rate. If
they do not rise to the challenge then transfer your
balances to the new card. One option for transferring
your balances is to take out a home equity line of
credit.
Home
Equity Line of Credit
A home equity
line of credit is a loan taken out against the equity
in your home, in other words your home is offered as
collateral. These loans are usually offered at low
interest rates. As with any credit, you should weigh
the benefits and costs before deciding. Bare in mind
that failure to repay the loan, with interest could
result in the loss of your home.
The credit
limit on the line is derived at by taking a
percentage of the home's appraised value and
subtracting the balance owing on the mortgage. The
line of credit amount is also based on your income,
credit history and additional debt load.
The home equity
line of credit works on a variable interest rate,
based on the prime rate. Lenders usually charge prime
rate plus a 2 percent margin. By law, equity lines of
credit must have a cap on how much the interest rate
may increase over the life of the plan. Some also
limit how low your interest rate may fall if there is
a drop in rates.
Home equity
plans may set a fixed period during which you can
borrow money. At the end of this draw period you may
have the option of renewal, or if no renewal option
exists, then the plan may call for full payment at
the end of the term.
As with any
contract, you must read the terms and conditions
carefully, as many plans have fees, charges and
hidden costs. Some of the costs involved in
establishing a home equity line of credit include
property appraisal fees, application fees, closing
costs and attorney fees. In addition to these costs,
you may expect to pay transaction fees every time you
draw on the line.
The benefit of
opening a Home equity line of credit is that the
minimum payments are low, often set at just the
interest or interest plus a few percentage points. Be
aware that with a variable interest rate, monthly
payments may fluctuate. If you sell your home you
will probably be required to pay off your loan
immediately.
No matter which
option you choose, the main goal should be to reduce
those high interest rates while paying the lowest
penalty for doing so. Weigh the pro's and con's of
all options carefully and choose a road that best
suites your financial situation.
Stay
Informed
It is important
to stay informed about your credit before you apply
for any loan. An excellent way to begin taking
control of your financial future is to obtaining a
copy of your credit reports before you see a lender.
Today you can get your free instant credit reports
from the major 3 credit report agencies online. This
way you can see exactly what the lender will see.
When obtaining your credit reports, you will want to
make sure you get your credit report scores as this
is what lenders base most of their decision on. The
higher your credit score the lower your interest
rate will be and vice versa. So be a wise
consumer, get you’re a copy of your credit
report and reduce your debt through lower interest
loans.
______________________
About
The Author : Melanie Cossey is a
successful home based freelance writer. Meanie writes
many informative articles on the topic of credit,
such as What is a FICO score and why is it important?
and Comprehending a Credit Report.
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