Consolidating Your Credit Cards Can Help

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If you make payments on several credit cards, you may want to consolidate your payments into one card.
Consolidating your credit cards has some great side effects. For one, it adds discipline to your spending. Keeping a running tally on one card is much easier than trying to do the same with five or six cards. You also write fewer checks to credit-card companies each month.
The real potential benefit of consolidating your credit card, however, is improvement in personal cash flow. For one, you avoid paying multiple annual fees. You may also be able to roll up several high-interest-rate cards into a card that has a lower interest rate.
To see whether consolidating your credit cards is a good deal, calculate the weighted-average interest rate for all of your card debt. This is easier to do than it sounds. Then, add the annual fees that you pay for each card. Finally, compare these costs to your consolidation offer. For example, assume you own the following four credit cards:
¬ Card ACard BCard CCard D
Interest
rate
17.5%16.5%16.0%15.0%
Ave. Monthly
Balance"
$1,500$1,000$1,500$1,000
Ave. Yearly
Interest
$262.50$165.00$240.00$150.00
Annual
Fee
$25$25$25$25

To calculate, divide the total yearly interest expense of the four cards by the total of average monthly balances. These are the sums of the third and second rows, respectively. Thus, your weighted-average interest rate is ($817.50 / $5,000), or 16.35%. In addition, you presently pay $100 in annual fees.
You could lower your bills if you find a card that:
Accepts your $5,000 of debt as transfer balances and charges you a rate that is less than 16.35%, and
Charges a rate of 16.35% or lower on new purchases, and
Has an annual fee of $100 or less (unless the interest rate on the consolidation card is low enough to justify the higher fee).
The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.
2008-06-09 15:24:20
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