Consolidating debt can be a good idea, but keep in mind how credit bureaus determine your credit score. If you have two credit cards, each with balances below 30 percent of your credit limit, the credit bureaus consider that a plus. If you consolidate your cards, and now have a single card with a balance of more than 30 percent of your limit, the credit bureaus may lower your credit score. There are a couple of ways to consolidate cards, but the best approach is to get a third card with a balance transfer capability, then use it to pay off the other two cards.
Apply for a credit card from a third company. Contact more than one company to find the best interest rate with a card that includes a balance transfer offer. In many cases, the balance transfer has an introductory interest rate of 0.0 percent for a number of months. Make sure the new company allows transfer balances from more than one credit card.
Complete the balance transfers. When you receive your new card, note how long you have to complete the transfers. In most cases, the balance transfer offer is only good for a limited time, often for no more than a month.
When you receive statements from the two companies you're paying off, there will probably be some small residual balances. Pay these off. Unless canceling the cards brings your credit card debt-to-available credit ratio above 30 percent, it's a good idea to make these final pay-offs by phone and to cancel the cards at the same time. Open credit cards with zero balances won't lower your credit score, but they can be a temptation to over-spend.
A month or two after you've completed your consolidation, it's a good idea to check your credit report from at least one of the three credit rating companies -- Experian, Equifax and TransUnion -- to make sure your information is correct. Sometimes cards you've paid off and canceled will still be listed as active with balances due. The Fair Credit Reporting Act gives you the right to obtain a free copy of your credit report every twelve months. You can ask for your report by calling 1-877-322-8228 or get free reports from the the three bureaus once annually from www.annualcreditreport.com. If your information isn't correct, you'll need to write the credit reporting agency a dispute letter. The Federal Trade Commission offers free advice about the process and provides sample dispute letters.
Consolidating two credit cards by exercising the cash advance capability on one of them to pay off the other is almost always a bad idea. The interest rate on cash advances is almost always considerably higher than the rate for purchases. Once you've exercised the cash advance, you can't pay it off until you've paid off the balance that existed when you took the advance -- until then, you're stuck with the higher cash advance interest rate on the money you've borrowed.
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