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By Melanie Cossey
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.
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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