Credit cards can be good or bad, it all depends on how they are used. Whether they are a good or a bad thing is totally dependent on the person who holds them.
They are a convenient way to make purchases on line and other purchases and payments without always have to write checks or carry cash. However, they can also be misused for spending beyond your means and that can lead to unimaginable levels of debt with huge monthly interest.
Many who let credit card debt get out of control see debt consolidation as the way out. They are often presented with a stack of offers to reduce their credit card debt by consolidating all their debt onto one credit card.
Normally these offers promise lower interest rates. However, the reality is that low interest rates are usually only a reality for people with excellent credit. The average person who is fighting to get out from under a mountain of debt does not have excellent credit and will likely not qualify.
But, they can offer a way to solve the problem over the long term. You may, in fact, be able to qualify - the only way to be sure is to apply. But even if you're accepted, there are several key items to keep in mind when considering this solution.
Consolidating onto one credit card almost never lowers your overall debt. So you haven't really improved your situation in any way. And interest compounding on such a large balance over a long period of time means higher overall interest paid back in the long run.
A lower interest rate can, indeed, be a benefit. But lowering the rate doesn't always mean lowering the total amount. If you pay 8% on a debt of $10,000 for, say, five years you will pay more than paying 10% on $10,000 for two years.
The reason is the compounding effect of interest. The total amount of interest paid in the first case is $2165.60. The net interest rate overall is 21.656% when calculated as the percentage paid beyond the principle. In the second case, you pay only $1074.80, with a net interest rate of 10.748%.
The 8% and 10% are not the total percentage of interest. This is the annual percentage rate (APR), only the rate for a period of a year.
Of course, the upside is that in the case of 8% over five years, you pay only $202.76 per month, in the second case you pay $461.45 per month. Many will find the former payment easier to manage than the latter. And, you may be able to find some middle ground. Calculators available online will help you run through the different scenarios, in order to guide you to choosing the one that's best for you.
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