Nowadays, more and more people are “robbing Peter to pay Paul”, trying to make ends meet in today’s economy. A big part of their strategy involves shuffling credit card balances around in an attempt to get lower interest rates and lower payments. The credit card companies know this and, to make the deals more attractive, they are offering low teaser rates and other benefits in an order to attract these customers.
The problem is, credit card defaults are up, legislation is looming, and approvals are tightening. The sweet deals are still out there for those with good credit, but have been heavily curtailed for those with marginal credit. For the purpose of this article, we will assume that you have good to excellent credit. We will also assume that your goal is to pay off your balance, not simply reduce your payments.
1. Don’t Transfer your Balance – If your sole intention is to transfer the balance to a lower interest card to pay it off without interest, then by all means, transfer the balance. However, most people transfer their balances with hopes of doing this and never do, the credit card companies know this and this is why they offer the 0% balance transfers.
Instead, visit your local bank, or one online, and transfer your balance to a fixed installment loan; You can use a car or other asset as collateral. Sure, your rate will be higher than the 0% introductory offer, but it will be much less than the 15% interest you pay at the end of the transfer. An installment loan forces you to pay the balance, and has a beginning and an end.
2. Do not use Reward Credit Cards – Reward cards are the cards that promise you gifts and cash back for using the card. The problem is, reward cards reward you for using your card, not having a balance. Reward cards almost always have higher rates than regular credit cards. Here’s the rub: it’s usually the reward cards that offer the best rewards.
3. Beware of the Transfer Fees – Nowadays, transfer fees are a catch 22 for most consumers who are interested in transferring their credit card balances. Most transfer fees are around 3%, or $150 per $5,000 of debt that is transferred. If you are truly going to pay your balance off in the intro time, go ahead and bite the bullet. If not, I suggest that you pay the $150 out of pocket in addition to your first payment so that you are not adding money to your debt.
4. Annual Fees – If you get zapped with a $50 annual fee and a 3% transfer fee, you may really want to consider your transfer. Transfer cards that offer 0% transfer interest rates are notorious for this. If you bypass a regular card with a low transfer rate like 2.9% percent for a 0% intro rate, you really need to do the math to see if the 0% rate is really the better offer. Cards with low intro rates, as opposed to 0% transfer rates, usually have better residual features like longer intro periods.
5. Do Not Pay Late – On every credit card application, in bold letters, is a phrase that essentially says, “We can hose you by raising your rate at anytime we want for any reason we want”. We all see it and pretend we don’t. Credit card companies are looking for ANY reason to trigger this clause; do not give it to them.
For most of us, balance transfers are, in essence, the proverbial spider inviting the fly into her parlor. Like I said, in today’s economy, it’s a necessary evil; you have to do what you have to do. However, you need to be realistic about how you will repay the transfer. Poor payment practices (only paying the minimum) can cost you dearly.
If you are planning an end to the intro jump, you also need to consider what your credit will look like in 12 months; higher debts equal lower credit scores. If your credit score deteriorates too much you may be stuck with the spider at the end of the intro period.
