Step-by-Step Method to Consolidate Your Credit Cards

When you get your first credit card, you use it only for necessities but when you get to know how easy it is to use this plastic cash, you start increasing your expenses. The result is more credit cards and debts than you can manage. This is the story of a majority of the people who use credit card.

When you have credit card debts, you know you are in deep trouble. But when your credit card debts increase, exercising a little will power and consolidating your cards will help you get out of the debt. Given below is the 5-step process in which you can consolidate your credit card debts –

1. CompilealistOfAllYourCardsandDebts

The first step you must take to get out of debts is to make a list of all the credit cards that you own and the balance against each card. Note down the rate of interest on each card. Compiling this information is essential so that you can decide the best way in which you can consolidate your card.

2. LookforCardswithLowerInterestRates

A number of companies offer credit cards with low rates of interests. If your income is fairly good and your credit report is also healthy, then you can avail these low interest cards. But first research them and compare the interest rates. Read the fine print to know the terms of each card.

3. PayoffOutstandingCardDebtswithYourSavings

A very simple and easy way to pay off all outstanding credit card debts is to use the cash in your savings. If you have sufficient cash, then repaying the debt can save a lot of interest. Otherwise, pay off the higher interest balances.

4. Get Equity Loans

For homeowners, using home equity credit is another option. You can use the equity in your home to establish a line of credit. The interest rates of equity loans are much lower than credit card interest rates. An added advantage of equity loans is that they are tax deductible. Therefore, this can serve a dual purpose.

5. Close Credit Card Accounts

Whichever method you choose to pay off your outstanding credit card debts, make sure that you do not use that card again. Cut it off after you close the account so that you are not tempted to use the card. You can do this at least for high interest cards. Keep one card to use in times of emergency and close the other accounts.

For more sound guidance on how you should use credit cards to your advantage and not disadvantage, you can visit the Bank of the Internet website. Getting a credit card is not too difficult. The difficulty comes when you are unable to control your expenses and the debts pile up. Before you use any of the above-mentioned options to pay off your credit card debts, understand the terms of each type of loan or home equity so that you do not regret your decision later on.

High Cost of Not Maintaining Credit

Credit bureaus consider absence of information similar to having bad information. Hence the only way to lead a good life is to ensure financial discipline throughout your life. Here is why opting out of credit or having a bad credit is not a viable option:

Expensive Mortgage: Nowadays, almost every American takes a mortgage on their house. At least every average American does. It is difficult to imagine getting by your life without a mortgage unless you are planning to rent out for your entire life. People with good credit score have a considerable upper hand in this regard. They tend to qualify for mortgages, which are subsidized by the state. The cost of having a non-conforming mortgage is at least 30% to 40% higher in the long run.

Expensive Credit Cards: These are useful in tough times caused by unemployment or other financial failure. People with bad credit history or none have to pay 30% to 40% more in interest charges.
Expensive Personal Loans: If you are planning to start your business or remodel your house, you may need a personal loan. That again will be expensive.

Not maintaining credit will shut you out from the mainstream financial system. The lenders need positive information about your financial behavior to make you loans on good terms. Since most people cannot get by without taking loans, ensuring a good credit score and favorable terms is not such a bad idea.

How Credit Reporting Works

Our society lives and thrives on credit. There are more and more lenders offering loans to different people. Many of these loans, such as credit cards and personal loans, are unsecured. This means that the lender is offering loans based on the reputation of the borrower rather than the number of assets he has as collateral. It is therefore essential that they have the required information before they make their decision. This information is provided in the form of a credit score.

Lenders Collaborate: Almost any loan that you take can be traced back to a few lenders. Thus, all the lenders have most of the information, amongst themselves, they need regarding lending the money. It is for this reason that they have set up credit bureaus. It is in their interest to submit information about every transaction with every borrower. The aggregated information gives the prospective lender a good idea about the creditworthiness of an individual. Every lender works for it and gets the benefit.

Periodic Reporting: Lenders report periodically to a third party organization. Usually they report every month or so.

Point System: Instead of considering the vast variety of information that a credit report may bring along, lenders usually look at a score. The point system has been well developed and provides the lender a good idea of the creditworthiness of an individual. For every favorable credit deed, such as paying bills on time, there is a positive score. Similarly, for every negative deed there is a negative score. This point system ensures that lenders do not have to deal with complex information.

Differential Interest Rates: People with good credit scores get the rewards in the form of lower payments, while people with bad credit scores are penalized.

How People Use Credit

Lenders are known to analyze your credit behaviour and put you into categories. This notion comes from the fact that there are a few broad ways, in which most of us use our credit. Here is a list of few behavioural types.

Transactors: This is the type of credit usage that most people intend to do. The idea is that credit companies give an incentive to use their services. Instead of transacting in cash, if one uses credit, they are able to make money on the interest earned in the interest free periods as well as the gifts and freebies that are on offer. However, this plan goes wrong when people forget to stick to the budget. Impulsive spending soon means that you are spending beyond your means and that paying in full becomes more and more difficult.

Revolvers: This is the kind of people that use credit to fill their monthly gap. To them solvency is not an issue. They are sure that they can pay the loan. However, it is the timing of the cash flow that is difficult for them to manage. Thus, they tend to fall into a cycle of keeping balances or missing payments, all of which affects their credit score.

Pretenders: The last category is the pretenders. These are usually people who have just started using credit. Many of them think about the credit card as a free tool. They think these as freebies on offer. They have no plans of repayments and have no clue what their financial state is.

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