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Consolidate Credit Card Debt – Best Way To Reduce Debts

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There is no quick way to reduce credit card debts. Nonetheless, those who outline a realistic strategy for reducing debts, and stick to this plan, will gradually reduce their credit card balances.

Consumers have several options for paying off credit card debts. However, this does not involve the balance miraculously disappearing. In most cases, consumers simply move the money and pay the debt in other ways. Here are a few tips on ways to consolidate debts and payoff credit card balances.

Refinance Home Mortgage Loan

With low mortgage rates, now is the best time to refinance a high interest rate mortgage. A refinancing affords the perfect opportunity for homeowners to lock in a fixed rate. In addition, homeowners have the option of borrowing from their equity and using the money to payoff consumer debts.

Cash-out refinancing will increase the total mortgage balance. If borrowing $15,000 from the home’s equity, this amount is wrapped into the new mortgage. Thus, if the old mortgage principle was $130,000, the new mortgage principle will increase to $145,000.

Debt Consolidation Personal Loan

Deb consolidation loans are an effective way to reduce and eliminate debts. Although this strategy simply moves the debt to another lender, debt consolidations have several advantages.

For starters, the interest rate on debt consolidation loans is significantly lower than most credit cards. With a lower rate, consumers have lower monthly payments. Furthermore, a larger percentage of the monthly payment is applied to the principle balance.

Many lending institutions offer debt consolidation loans. In most cases, collateral is required. If your credit rating is very high, a lender may approve an unsecured debt consolidation loan. However, be prepared to pay a higher interest rate.

Secured debt consolidation loans offer the best rates and terms. Different types of secured debt consolidation loans include loans protected by a vehicle title or a home equity loan.

Consolidate Debts with a Balance Transfer

If you have three credit cards with extremely high rates, consider combining all three balances onto one credit card. Many balance transfer credit cards offer zero percent interest for a specific length of time. If you are serious about reducing your debt, apply for a balance transfer and take advantage of the low introductory rate. However, avoid late or skipped payments. These will likely cancel the zero percent interest period, in which the lender may charge a much higher rate.

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Many people have jumped on adjustable rate mortgages to take advantage of the historically low interest rates we have seen over the last few years. Rates are now rising, which means you need to understand caps.

Adjustable Rate Mortgages Talking About Interest Rate Caps

An adjustable rate mortgage is just what it sounds like. The interest rate can be adjusted to match certain interest rate standards. The advantage of such a loan is it can seriously lower monthly mortgage payments if interest rates are low. Over the last few years, of course, rates have been incredibly low. Rates are now rising and you need to understand what that means for your adjustable rate mortgage.

Since the interest rate on your loan is adjustable, you should be getting a little nervous about rising interest rates. That being said, most loans have graduated step increases and caps that keep things from getting nightmarish too quickly. Here is a closer look.

A good adjustable rate mortgage protects you from massive rate increases through something known as rate caps. There are two types of rate caps. Each has benefits and negatives.

A lifetime rate cap is just what it says. This cap sets the maximum interest rate the lender can charge you for the loan. You must always demand a lifetime cap on any mortgage you take out. Assume you take out an adjustable rate mortgage with an interest rate of four percent. As part of the agreement, the loan has a lifetime cap of eight percent. If interest rates shoot up to 10 percent, your loan will cap out at nine percent. While this is a high interest rate, it is a lot better than paying 10 percent.

Periodic rate caps also protect you, but in a different way. A periodic rate cap defined the maximum percentage your interest rate can increase over a period of time. The shorter the time period, the better the cap. If your loan document allows the lender to adjust the rate every six months, the cap may be as low as one percent. This means the lender can only increase the interest rate by a maximum of one percent, regardless of what the market is charging for new loans.

Adjustable rate mortgages are great when interest rates are low. When rates start creeping up, however, you need to take a close look at your caps.

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Over the last few years, many people squeezed into new homes using adjustable rate mortgages. With interest rates going up, you now need a new interest rate strategy

Adjustable Rate Mortgages ARMs

Adjustable rate mortgages carry a bit of a gamble for home owners. Essentially, you trade smaller interest rates and lower initial payments on the gamble rates will not increase over time. If rates stay low, you make out like a bandit. If rates increase, you need to consider your options to avoid getting stuck with a high interest rate loan and resulting cash flow problems from increased monthly mortgage payments.

For the last three or four years, adjustable rate mortgages have been offered with incredibly low interest rates. Many people used these low, low, low rates to buy homes that would otherwise be beyond their means. Starting in 2004, Federal Reserve Chairman Alan Greenspan started making noises about increasing money borrowing rates. He has followed through on these hints. Although mortgage rates arent tied directly to the Federal Reserve Bank, they are heavily influenced by it. As a result, many people are now facing tight finances.

Avoid Rising Rates

There are really only two solutions for avoiding the increase in interest rates on adjustable rate mortgages. The first strategy is to immediately convert to a fixed rate mortgage product. Fixed rates are still at historic lows when compared to rates offered over the last 50 years. By flipping to a fixed rate, you will be able to solidify your budget and finances since you will know exactly what you have to pay each month. If rates decrease in the future, you can always try to flip back to an adjustable mortgage loan.

Unfortunately, some home owners are simply going to have to face the fact they lost one the interest rate gamble. Typically, this will occur when you realize you simply cant afford to make the monthly payments required by getting a fixed rate loan. In such a situation, you are going to have to sell your home and downsize. In most situations, it is better to do this now since youve probably built up a sizeable chunk of equity over the last few years and want to avoid a loss of that equity as the market cools down. While this may sound like a disaster, it really isnt. Yes, you have to downsize, but you should still have built up a chunk of equity.

Interest rates are going up whether you want to acknowledge it or not. The time to deal with your adjustable rate mortgage is now, not when you straining to make payments.

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Over the past two years, the Federal Reserve has raised interest rates substantially. Consequently, credit card annual percentage rates have followed suit. Nearly all credit cards tie their interest rates to the prime rate, which has doubled to 8% from 4% during the string of rate hikes that began in 2004. This has led to interest rates on credit cards rising by 30% or more. Since August of 2006, the Federal Reserve has kept interest rates steady, and many economists believe the next move may be a reduction in rates. However, the rate reductions have yet to begin, and credit card interest rates remain relatively high.

For those who carry balances on their credit cards, high interest rates have resulted in higher monthly bills, with many seeing their minimum payment increase substantially. Fortunately, now, more than in recent years, 0% credit cards offer a safe harbor from high rates. There are two basic types of 0% credit cards: those that offer a 0% rate on balance transfers, and those that offer a 0% on purchases. The best credit cards offer 0% interest on both. How much savings can these credit cards provide? Lets take a look at the math.

Lets assume youre carrying a balance of $10,000. If you simply pay the minimum each month, you will accrue close to $2000 in interest over the course of a year, thanks to daily compounding balances (too bad savings accounts dont pay that type of interest). With a 0% balance transfer, you can expect to save all of that money, plus, youll be given time to pay down that debt. When the 0% period expires, not only is there a chance your interest rate will be lower, but, if rates do not go down, you can always transfer the balance to another 0% credit card. Plus, if you make a minimum payment of $150 a month, your balance at the end of the year will be closer to $8200, rather than $12,000. Thats quite a difference.

Now, if youre fortunate enough to have no credit card debt, a 0% interest rate can be handy tool to avoid interest expenses on new purchases and free up some cash in the short term. Need a new fridge? Have to fix your car? Want granite counters for the kitchen? With a 0% credit card, you can defer the cost of these expenses for a year while taking advantage of high interest rates. How? By placing the cash that would have left your bank account into a high-yield savings account and taking advantage of rewards credit cards.

Lets assume you will make $10,000 of purchases over the next few months. Using a credit card with a 0% interest rate and 1% cashback rewards, coupled with a high-yield savings account with a 4% interest rate can put about $500 extra in your pocket over the course of the year.

Of course, not everyone pays their balance in full each month. With average credit card interest rates in the 12% to 15% range, carrying a monthly balance of only $1000 can cost close to $150 a year. Saving $150 in interest charges may not be a fortune, but its surely enough to buy a nice dinner with a good bottle of wine.

No matter how you use your credit card, a 0% interest credit card can have a positive effect on both short and long term cash flows. Given that the alternative is paying more than 12% in interest, choosing a 0% credit card in this atmosphere of high interest rates is a no-brainer.

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