Are Low Interest Credit Cards Good Or Bad For People In Debt?
Whether you are in debt or not credit cards are simply a financial tool and, like most tools, they can be used to your advantage or to your disadvantage.
Credit cards were originally designed to provide convenience, reducing the amount of cash which you needed to carry with you and enabling you to make purchases over the telephone and now through the Internet. However, for all too many people they have become a quick and easy way to borrow money so that they can shop today and worry about paying for their purchases tomorrow.
As a result people nowadays often have several credit cards which they run up to their limit, suddenly finding that they have combined monthly payments which they can no longer meet. So what is the solution?
Many people these days are turning to yet more credit cards. In this case, lower interest credit cards which allow them to consolidate their existing credit card debts onto a single credit card and lower their monthly payments. But is doing this such a good idea?
For some people it can be helpful but you have to understand just what you are getting yourself into before you decide to consolidate your credit card debt in this manner.
The first thing you need to look at is the rate that you will actually be charged. In general the low advertised rate will only apply to people with a good credit rating and, if you have experienced a problem with debt management and have a record of late or missed payments, then you will almost certainly find that the rate you will be required to pay is higher than that advertised. Unfortunately, there is no way of knowing this in advance and the only way to find out the rate you will have to pay, and indeed whether or not you will be issued with a card at all, is to simply apply.
The second thing you have to understand is that it is very unlikely that simply changing credit cards will do anything to reduce your total credit card debt. If you have maxed out your cards to $10,000 before consolidation, then you will still owe $10,000 after consolidation.
The third thing to consider is just what effect a lower interest will have on your debt. Certainly a lower interest rate will reduce your monthly payments but lower rate cards also typically end up extending the period over which your repayments are made and paying 7% over 5 years will represent a considerably higher total repayment than paying 10% over 2 years.
Interest rates on credit cards are complex because, unlike many loans, interest is calculated monthly and compounded over the life of the loan. Your monthly payments may therefore seem quite reasonable, but when you work out how much you will actually pay in total to clear the debt on your card you might well be shocked at just how high the figure is.
If you simply cannot meet the monthly payments on your existing cards then consolidating that debt onto a lower rate credit card may be one solution but you need to look at the figures very carefully and decide whether or not it is a price worth paying to solve your problem. Remember, this is only one solution to the problem and there are usually other options open to you which may prove to be better in the long run.
