September Newsletter, 2008

Step Slowly onto the Balance-Transfer Wagon

By Tamara E. Holmes •

When you’re trying to pay down debt, a balance transfer to a credit card with a lower interest rate may seem like a good idea. After all, the lower rate will save you interest fees, right? Not necessarily, according to a number of financial experts who say the money transfer game should only be played if all of the rules are understood.

“We tend to recommend against balance transfers because basically what you’ve got is a situation where you’re not really making any progress,” says Nick Jacobs, spokesman for the National Foundation for Credit Counseling. “All you’re doing is perpetuating your debt because you’re moving your debt from one card to another. All you’re really doing is trying to stay ahead. It’s a tough proposition.”

The process works like this. Say you have $10,000 in debt on a card that is charging you 18.9 percent interest. You get a credit card solicitation in the mail offering you 3.9 percent if you transfer your current debt load to the new card. At first glance this sounds like a terrific deal since your new interest rate will be 15 percentage points lower.

But balance transfer offers tend to be temporary, as credit card companies seek to entice new customers with low rates only to raise them a few months later. In many cases, once the promotional period is over, a consumer is stuck with an interest rate that’s higher than the initial rate with which he or she started.

Another factor to keep in mind is the effect balance transfers will have on your credit score. If you’re constantly opening new lines of credit so you can transfer your debt, you may be doing more damage than good because multiple credit inquiries and the opening of new lines of credit cause your score to drop.

Creditors will also be able to see your pattern of transferring balances and that might affect a lender’s decision to extend credit at a later date, says Jennifer ‘J.B.’ Bryan, president of J. B. Bryan Financial Group, based in Washington , D.C.

“If you keep switching, it will be on your credit report and that may stop you from being attractive to creditors,” Bryan says.

Making balance transfers work

That’s not to say that transferring debt to a lower-interest credit card is always a bad proposition. “If you do switch, you have to have a full strategy in which you’re going to pay it off during the promotional period,” says Bryan .

Say you plan to pay off your debt in six months, and a credit card offer comes your way that promises a significantly lower interest rate for the next six months. That offer might be a good one since it can expedite your payoff plan and save you money down the road.

However, you’ve got to be committed to paying down the debt. The lower interest rate will likely lead to a lower minimum payment. If you spend the extra money rather than funnel your funds to paying off the debt, you might find yourself back in debt trouble or still making payments six months later when the promotional period ends.

It’s also important to understand your credit card agreements. “Always read the fine print,” says Michelle Oliver, owner of The Oliver Financial Group in Richmond , Va. “Each credit card company is different when it comes to laying out their own rules. In other words, what may be good for one company may not be good for another.”

For example, some cards may charge a hefty balance-transfer fee. Such charges must be factored into your decision.

Also, it’s important to know yourself. If you have a history of paying bills late, understand that any late payments could lead to the immediate termination of the promotional rate. In that scenario, you’ll be stuck with whatever rate the creditor gives you, which may well be higher than the rate you had before the transfer.

Making promotional offers pay

Promotional offers in the mail can help you improve your debt situation in another way. Often, such offers can be used as leverage to get your current creditors to lower your interest rates. If another lender offers you a better rate, call your current creditors and let them know you’re thinking about taking the better offer.
“If consumers approach the company and tell them ‘I’m considering switching, can you lower my interest rate?’ most of the time that will lead the credit card company to do that,” says Bryan .

Your current creditors won’t want to lose you, and if you’ve been a longtime customer who has generally paid your bills on time, they’re more likely to work with you to make your credit card agreement more attractive.

There are various ways that credit card companies work with consumers. For example, some creditors will lower your interest rate if you agree to let them take the payment each month automatically from your checking account. Creditors can also help you out by deferring payments if you’re going through a rough time or moving payment due dates around to accommodate your cash-flow situation.

An added benefit of staying with your current credit card company rather than jumping ship is the history you have with your current creditor. If you run into problems down the road, it may count for something. However, if you still decide to transfer the balances on your credit cards, make sure you’re doing so as part of a plan to eliminate your debt altogether, rather than merely doing so to free up some extra money.

“If a person is that savvy in moving debt, then they should be savvy as well in saving, investing, and decreasing and eliminating the debt,” says Oliver. “Shifting the mind-set to eliminating the debt rather than lower charges will bring a person closer to financial freedom.”

Is Bankruptcy the End of My Credit Life?

No! It doesn’t have to be.

You can recover if you get back on a firm credit track, and by that we mean paying your bills within six to 12 months and making sure the creditors report it to the credit agency. You may also have to hound the credit-reporting agencies to make sure your positive strides are noted on your credit report.

Smart Money Move: You can begin to restore your credit by getting a secured credit card. Almost any bank will give you one. To get a secured credit card, you must first put up the cash before you can use the card. So if you put $1,000 into your account, your credit limit for is $1,000. As with all cards, shop around because the fees involved will vary.

There is another option, but you need to be careful. A number of issuers are now offering non-secured cards that cater to people who are trying to establish or restore credit. Check for the most recent deals.

Be aware that these cards will NOT give you the best interest rates. Most will charge from around 15% to 25%. Many also come with annual fees, which often range from $15 to $50, and your credit line may start as low as $500. The credit companies have begun to smell a growing market in people without sterling credit (don’t get us started on that one!), so you might even find your mailbox flooded with offers.

We recommend the secured credit card route if at all possible. But no matter which one you choose, say it with us now, PAY YOUR BILLS ON TIME! It will take hard work, but you can recover from bankruptcy.

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