Low Interest Credit Cards – Savior or Devil?
February 26th, 2007 Credit Card
You cannot be saved or destroyed by credit cards. These credit cards are just a tool and you are the one who has to decide how to use them.
Credit cards can be used for convenience, for online shopping and for numerous other reasons as well. They can also become a way for you to increase your debt, causing you to have to pay a lot of money in interest rates each month.
Many people who let their credit card debt get out of hand see debt consolidation as a way out. This is because they are presented with numerous offers to reduce their credit card debt through consolidating all of their debt onto just one credit card.
While these offers claim to be giving you “lower interest rates,” you really should be skeptical about them. This is because these lower interest rates are usually only available to select individuals who have great credit ratings. Therefore, the typical person who is struggling to overcome their debt is not going to find an “escape route” here.
You may be able to qualify for this though. It is a way in which you can solve your debt over the long-term. However, you will have to apply to see if you actually qualify. Even if you are accepted, there are some things that you need to keep in mind.
Rarely will these credit card offers actually lower the actual amount of your principle outstanding. Thus, you will have exactly the same amount of debt whenever you get the new credit card. Then, over the long run you may end up paying more.
It can be beneficial to have a lower interest rate. However, when you lower the rate, you do not necessarily lower the entire amount of your debt. For instance, if you pay 8% on your $10,000 debt for 5 years then you will end up paying more than paying 10% on $10,000 for 2 years. This is because of compounding interest. In the first case, the total amount of interest paid is $2,165.60. Overall, the net interest rate is 21.656%. In the second case, you will pay $1,074.80 and your interest rate will be 10.748%.
In each of these scenarios, the 8% or the 10% are the APR (annual percentage rate). This is the rate that you will pay for a year. It is not the total percentage of interest.
There is an upside. In the case of 8% over 5 years you will only pay $202.76 per month. In the second case you will be paying $461.45 per month. You are probably like most people in that you will find the first payment easier to manage. It is also possible that you may find some middle ground. There are online calculators that will help you view these various scenarios. They will help you to decide what is best for you.