The Delicate Balance
May 8th, 2008 | by rachel |
If you have multiple credit cards and you are carrying unpaid balances on them, using a balance transfer has probably crossed your mind. More than likely, you have received offers for pre-approved balance transfers in your own mailbox and they sound like a great deal. If you read the ads, you may figure you would be crazy NOT to move your money to another card! Before moving anything, make sure you fully understand the terms and conditions of the transfer you are considering.
In order to transfer a credit card balance, you need to either have an existing account with credit available OR you need to get a new card with a credit limit high enough to accomodate the balance(s) you want to move. In that way, a balance transfer offer is basically the same thing as getting a new credit card. Before agreeing to that, make sure that your credit score won’t suffer.
Balance transfers are often used by credit card companies to attract new customers. By simply pulling your credit report, a credit card company can target you with an offer that addresses your specific needs. Realize, first and foremost, that credit card companies want your business (and your interest payments) more than they want you to have a good way to pay down your debt.
At first look, balance transfers seem like a bargain because they offer little or no interest compared to the rates on other credit cards. There are LOTS of conditions that go with those low interest rates and you need to understand them completely to make a fully informed decision. Most balance transfers include “transfer fees”. That means that you are charged fee (usually a % of the amount you transfer) just for the privilege of doing so. The transfer fee typically runs 3% of the amount transferred. Some companies cap that fee at $50-75. You need to find out how much you will be charged up front to know whether or not it makes sense to move your balance. If you are only transferring a few hundred dollars, $75 may be better spent toward reducing the balance where it is.
Companies offering balance transfers use “teaser rates” and time limits to entice people to switch to their cards. Find out what the time limits are on the low rate to determine whether or not you can pay off the balance before the rate goes up. Also, credit card companies set strict limits on when payments are made and posted. If they are received and/or posted after a certain time on the due date, you are charged a late fee. In some cases, that may qualify you for “universal default” on your balance.
When transferring a balance, don’t be surprised to find that there is no grace period before interest charges start being calculated. Likewise, the balance transfer rate will only apply to the amount transferred from other cards. Any new purchases will be charged at the regular interest rate for that card.
One of the dangers of using balance transfers is having access to “empty plastic”. In other words, once you move your unpaid balances to a lower rate card, you have available credit on the original cards. To use balance transfers responsibly, you need to limit or eliminate access to cards so you cannot charge up new balances on the old cards.
When reading about balance transfers, it’s not unusual to hear references to the “Transfer Game”. Some customers try to beat the system by moving their balances around at the end of the teaser rate time period. It is VERY DIFFICULT to do this successfully! More than likely, your time and energy would be better spent paying the balances off ASAP rather than moving them every few months. Remember that new credit inquiries and new credit accounts affect your credit score. If you are going to use a balance transfer, think of it as a short-term tool for eliminating debt.
When used correctly, a balance transfer can be a great tool. I have used them in the past and found them to be quite beneficial in lowering the amount of interest paid for previous purchases. They should never be used, however, as a means for adding to your overall debt. Money you owe to creditors is definitely a serious matter. Treat your balance delicately to make sure you make the best transfer deal possible.