Can You Use Zero-Interest Credit Card Offers to Consolidate Your Debt?

You have a lot of debt piling up and, uninvited, you get a letter from a credit card company suggesting that you write one of their handy checks and pay off your high-interest debts and put them on a brand new credit card. The kicker to the offer is that this new credit card is going to charge you no interest.

Should you do this?

In a way, this is a mini-version of what debt consolidation is all about. Debt consolidation is one of many approaches to debt; it works by taking lots of smaller debts and rolling them together (that's the consolidation part) into one jumbo debt. The idea is that you can likely get better terms (less interest) on one large debt than on several smaller debts. Besides that, one payment a month keeps life simpler than having to make a dozen or more smaller payments (and there is less risk of missing a payment and getting a black mark on your credit report).

Still, caution is warranted. The first thing you need to do is review the actual offer extended by the credit card company. While zero interest is no doubt true, no company is going to extend that offer to you without some strings. Typically, the two main strings to look for is "how much?" and "how long?"

For instance, you may only be able to consolidate a specific amount of money to the new zero-interest offer. Let's say it's $5,000. If you want to consolidate about $5,000 worth of debt or less, this is a workable amount. If you're facing $80,000 worth of debt, this isn't going to help much.

Next, look for the time limits. The company extending this kind of offer is going to set some specific time on the offer. You may get zero interest for a few months or even a year or more. But there will come a day of reckoning when you go back to a regular (or even higher-than-regular) interest rate.

Some offers for no-interest loans require that the loan be paid in full by the due date otherwise all of the interest is due. Furniture stores often extend this kind of credit. Let's say you buy $10,000 worth of furniture and the store says you can borrow that money free for one year instead of at the store's usual rate of 22% (yes, a lot of furniture stores charge rates that high). If you pay off the entire $10,000 before the year is up, you owe no interest. But let's say you paid $9,950 before the year was up but on the day the offer expired, you still owed $50. In this example, the company would be within its rights to charge you $2,250-that's $50 for what you owe and the $2,200 interest you owe because you did not pay the loan in full by the due date.

So find out how much money you can consolidate and how long the zero-interest offer lasts (and what happens when it expires). Then you need to do some number crunching and soul searching to figure out if you can honestly expect to pay it off on time. For instance, if you owe $5,000 on a variety of credit cards, you can take two or three years to pay it off. Should you opt to consolidate some debts into a zero-interest offer with a ticking time clock, you are putting yourself under tremendous pressure to pay off that debt in one year. Can you do that? Sit down and figure it out (in this case, it means paying in about $417 a month, minimum, without fail).

The other issue involved in debt consolidation involves a process I call "stopping the bleeding." Think of debt as hemorrhaging money. Just as no person can hemorrhage blood indefinitely without suffering dire, even fatal, consequences, nobody can hemorrhage money for too long without financial disaster.

If you are still hemorrhaging cash, there is not much point in consolidating your debt. That's like taking an aspirin when you need a tourniquet. Debt consolidation works best when the debt is a finite thing (for instance, you got in serious debt over an accident or medical problem) or when you have figured out how to end the cycle of spending more than you make. Debt consolidation is the sort of approach that can help you clean up a financial disaster but it does not really tackle the root cause of why you got into debt in the first place.

Are these low-interest or no-interest loans a good deal? Actually, they can be, but they are better deals to highly disciplined money managers than to the debt-laden. If you are the sort of person struggling with mounting debt, taking on a project like this--a large debt with a ticking clock--can be stressful and might even require more financial discipline and resources than you can muster.

Another downside of the no-interest credit card offer is that it puts another credit card into your wallet, and one that you will be encouraged to use. If you already struggle with credit, you really don't need to add more temptation to your life.

That does not mean debt consolidation is not a good solution. If you can get a handle on your debt situation, figure out how to stop the downward spiral, and then work out a budget and plan to get free of debt, debt consolidation can be a great solution. In fact, it's a financial method used by large businesses and wealthy individuals to handle special financial situations. The trick is that there are many ways to consolidate debt and other ways that can be much more advantageous to those struggling with overwhelming debt.

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