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Debt-consolidation plans are chancy propositions
By Steve Bucci
Bankrate.com
Tucson, Arizona | Published: 04.09.2006
Q: One of my credit-card companies has a debt
consolidation loan that would allow me to pay off my credit cards in
five years at a variable rate of 7.24 percent.
As the minimum payments on a couple of my credit cards
have jumped to a level such that it is now a struggle to come up with
the extra cash, I am definitely considering this offer. Is this a good
idea?
A:
You will be well-served to look at this offer from all sides before
you accept it.
Here are three key items to consider:
1. The interest rate is variable.
The term "variable rate" should scare the pants off you when it comes
to a loan and you are in a position of having trouble making all your
payments. Remember, the credit-card company is providing you with a
service that, at first glance, looks like a lifesaver; but it is in
business to make money, and the ability to change your interest rate
(with the word "variable") is one of the ways it can and likely will.
Further, variable rates are tied to the prime rate, and it has been
steadily rising and may also make your rate rise.
2. You are having trouble with your current minimums.
You are having trouble repaying a loan that likely is already
amortized over eight to 10 years. The minimum payment rules changed at
the beginning of 2006, requiring that a minimum payment has to cover
interest, fees and allow you to pay off the loan in a reasonable
amount of time. The bank decides what is reasonable, and it is usually
between eight to 10 years. If you go to a five-year repayment period,
your monthly principal amount will have to increase. A temporarily
lower interest rate may make the payment lower, but that may change
with the variable interest rate. The five-year term will not.
3. Is there a penalty-rate clause in the terms?
Check out the fine print relating to universal-default
terms and the penalty rate on this card. Some cards use a
universal-default provision that says if you are ever late on any
obligation, even to another lender, the company can charge you a
penalty rate. Some can even do it if your credit score deteriorates
but you are never late.
Penalty rates vary by card issuer, but as of this writing, some large
issuers, including Citibank, Chase and Bank of America, charge 31.5
percent!
Still, if the offer checks out, it may be a good one to consider. A
last suggestion is to go to your local bank or credit union, bring the
offer and see what they will do for you. You may be surprised at the
result.
I
don't want you to be put in the position of believing that you have
your debt under control with the debt-consolidation loan and then have
the rug pulled out from under you if your creditor increases your
interest rate and your monthly payment increases to an amount you
cannot afford.
Source: Azstarnet.com
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