With debt consolidation, you will take out a loan to cover all your other debts. Some credit card customers do this to simplify their lives. Instead of paying eight different bills for eight different cards and deciding “which one to pay this month,” borrowers can pay off all their creditors in full immediately and then just concentrate on making one lower payment to repay their debt consolidation loan instead.
You can run into problems, however, if you keep using your credit cards after you take out the loan.
Video: Frontline – Secret History of the Credit Card
How Do Credit Card Companies Make Money?
In 2007, credit card companies made $18.1 billion in late fees alone! A quarter of college students said they’ve paid at least one late fee in the past year. Nearly 60% of late fee payers actually had enough money in the bank but paid out of sheer negligence, found a 2007 study conducted by New York University, York University and the University of Alberta. Over all, transaction fees, late charges and over-limit penalties accounted for 33% of creditor profit. The other 67% was racked up in interest charges.
To avoid paying late fees, you should diligently check your statement each month and stay organized! Mark due dates on your calendar and give yourself a week or two to account for mail routing (if you’re mailing in checks.) You might want to also consider a direct deposit setup if you’re chronically missing your deadlines. Another great trick is to call the credit card company and request that your due date be moved to a more convenient time – like after payday!
You should carefully scrutinize your bill each month, keeping all your receipts to verify the information. Sometimes a store will accidentally charge you for something twice or a restaurant will add an extra tip onto your credit card. Also look out for things like credit monitoring or late fee protection that you may be automatically signed up for but did not order. If you find suspicious charges on your card, you can notify your creditor within 60 days and they will look into the matter for you.
Sometimes your lender may not credit you properly for a payment you’ve recently made or returned merchandise. It’s all too easy to assume that these transactions will be automatically taken care of. However, your vigilance can save you a lot of money in the end.
Avoiding interest is as easy as paying your bill on-time and in full every month. Also, avoid the temptation to take out cash advances, transfer balances, buy the monthly protection plan or surpass your credit limit – all of which result in added fees.