Should You Lump Credit Card Debt Together?

Jackie Fox, who is juggling about $8,000 in credit card debt, thought she might be able to scramble out of her debt hole by signing up for new credit cards that offered introductory interest rates of zero percent.

In an e-mail to Good Morning America's Financial Contributor Mellody Hobson, Fox asked whether switching her balances from one card to another one that offers zero percent introductory rates was a wise thing to do.

"Is this a good thing or should I leave them on the card with the lowest APR?" wrote Fox, a 36-year-old welfare-to-work mentor. "Help!!!"

Her confusion is typical. Since the average American household owes about $8,400 in credit card debt, it's no surprise that millions of debt-wracked consumers are turning to the debt consolidation offers jamming up their inboxes and mail slots.

Debt consolidation is one of the fastest-growing industries in the United States, where credit card debt is increasing faster than any other form of debt. Americans now owe a record $1.7 trillion to credit cards, department stores and automakers.

But anyone considering debt consolidation should be aware of the pitfalls in everything from low-rate credit card offers to debt consolidation companies, Hobson said.

A Credit Card Ploy

In Fox's case, she should let those tempting zero-percent credit card offers pass her by, Hobson said.

"It's such a ploy that some of these credit card companies use. The zero rate is a teaser, generally for no more than six months, so it's short-term, not a solution," Hobson said. "Unless you know you're going to get a big load of money shortly, say in the form of a big raise, inheritance or something, you're in a worse situation. Because all that money's coming due at a certain looming date, back at a high rate."

Hobson recommends leaving the debt on the card that has the lowest annual percentage rate. Taking up zero-percent offers leads to opening more cards, and building up new charges on them, she said.

Brigidanne, a 37-year-old single woman from Newburgh, N.Y., also had a consolidation question.

"Which is the lesser of two evils — going for debt consolidation, or getting a loan for this purpose at a high interest rate?" she asked. "I would like to reduce the 'just squeaking by' scenario I am currently in."

There are two options most people consider, and both contain perils, Hobson said.

Consolidation Loans: A consolidation loan combines payments on other loans, so you've got one monthly bill to the lender, ideally at a lower percentage rate.

Consolidation Plans: The debt consolidation agency becomes a bill-paying service that works with creditors to reduce or eliminate interest and late fees in exchange for making a payment every month. In exchange for this service, the consumer pays a monthly lump sum plus a service fee to the agency that then distributes the payment to your creditors. No money is loaned; rather, your debt is restructured. This type of plan is suitable for unsecured loans such as credit cards, and usually lasts three to four years.

Hobson has cautious words for both courses of action.

"An important thing to know is that once you work with a counseling or consolidation agency, it may show up on your credit report," Hobson said. "Another key thing to remember about loans is that the most dangerous debt consolidation loan is a home equity loan that uses a borrower's house as collateral. It's a huge risk because of the potential for foreclosure."

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