Debt consolidation deals via credit card transfers do have some risks

More and more Americans are finding themselves with debt that they cannot pay off. A good portion of this debt consists of credit card balances. With rising heating fuel, natural gas, and gasoline prices, along with increased minimum payments on credit card bills, many people are finding it harder than ever to pay down their balance. The number of businesses dedicated to providing debt consolidation services is increasing to meet the demand.

One solution being offered by more and more credit card companies is the debt consolidation loan. It makes sense from their perspective; why not offer customers the opportunity to move large balances from other cards to the one they offer? While the card companies make a small amount of money through the 1-2% fees they charge merchants at the time of sale, most of their revenue comes from the interest payments that they receive from customers. Interest rates on most types of loans are fairly low, but for credit cards, the rates tend to be at least twice as high. It’s a profitable business, so why not extend it towards “helping” people pay off other bills by offering a debt consolidation loan?

There are several things to consider if you are thinking about transferring balances from several different accounts to a single credit card for debt consolidation purposes:

• The company may offer you a favorable interest rate for the “lifetime” of the loan, or they may offer one that is only temporary. Make sure that you know what the rate is and when, of if, they say they will change it.
• Is the rate fixed, or is it a variable rate? Variable rates can change suddenly; you want to be aware of just how much your payments can increase, especially if the amount of money you are repaying is in the thousands of dollars.
• What is the penalty interest rate? Credit card accounts have a penalty rate that can take effect any time you make a late payment. Those rates tend to be prohibitively high; your “low” consolidation rate may be replaced by a 30% penalty rate if you make a late payment.
• Does this account have a universal default clause? If it does, the penalty rate may apply if you make a late payment to anyone. Paying the electric bill late could trigger the penalty rate on your credit card account. This would effectively negate any benefits you might receive from the low consolidation offer.
• Read the fine print. Most credit card agreements state that the company can raise your interest rate at any time, for any reason. The only requirement is that they provide you with two weeks’ notice. In short, any such offer, including one that is for the “life of the loan” is really only good as long as the company says it is. 
• Can you do better by obtaining a loan from your bank or credit union? You might get a better interest rate and one that is permanently fixed from another source. Check around first.

These offers may sound enticing, but remember - they are offered by the company for their benefit, not yours. They are extending these opportunities to you because they think that they will make money off of it. 

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