Balance Transfers
One of the ways to deal with high interest rates on existing credit cards is to apply for a lower-rate card and transfer the balance. When lenders were throwing credit this way and that, it wasn’t unusual to come home to find a balance transfer offer from some credit card company. And while transferring your balance from a card with a 28.8% rate to a 2.5% interest rate may seem like a no-brainer, there are a few things you should watch for.
The first thing to check is how long the lower rate will last and what the rate will be when the special offer period is over? Offer periods vary from six months to twelve, after which the card will revert to the normal (usually much higher) interest rate. If you can’t pay your balance off before the rate skyrockets, you may be stuck paying even more than before.
Note on your calendar, in your day book or in Big Fat Red Capital Letters on your wall the date that the special promotional interest rate ends and plan to either have the balance paid off in full or have a plan to transfer the balance to a cheaper option when the higher rate kicks in. The credit card company isn’t going to remind you, so if you don’t keep track you can’t go whining about what fiendish louts they are.
Make sure you understand what the low rate applies to. There are generally three type of transactions you can have on your credit card: a cash advance, a balance transfer, and purchases. Each of these transactions often has a different rate, with cash advances usually highest. If the offer you receive applies only to a balance transfer, do not make additional purchases on that card. Why? Because every payment you make will go against the balance transfer, leaving the new purchases to build up interest at the higher interest rate. Really! That’s what happens! Believe it!
Are there any fees associated with the balance transfer? Balance transfer fees are usually buried in the mouse print so read thoroughly before you make your transfer. Many people receive offers with no balance transfer fees and that will be clearly stated.
While you’re always supposed to pay your credit card on time, missing your due date by even one day on a balance transfer will result in the lender switching you automatically from the promotional rate to the standard rate, no ifs, ands, or butts.
If you do a balance transfer, you have to cut up the old card. Don’t cancel the account for six months so you don’t lose the credit history. But don’t fool yourself into thinking that you’ve taken care of the problem and that you now have even more “free money” to spend. This is one of the biggest traps of balance transfers. If you forgive yourself and don’t get a handle on your expenses – if you continue to think of credit as disposable income – then it’s only a matter of time until you’re pulling your hair out and running naked through the streets screaming!
Remember that credit card companies don’t make low-interest balance-transfer offers out of the goodness of their hearts. They know the odds are on their side that you’ll fail to pay off your balance on time, triggering the higher rate or neglect to switch your balance to another credit card when the promotional period is up.
Make sure you like the features of the card to which you’re transferring. A card with an annual fee is a card that costs more. Call it a fee, call it interest, the point of the transfer is to get those costs DOWN.
And please, please, don’t forget about your old card. Until you receive some sort of confirmation that the balance has officially been transferred, you still need to meet the next due date of your old card, or you risk getting slapped with a late fee.