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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.
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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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