Credit Repair - The Pitfalls Of Playing The Balance Transfer Game | Debts

Credit Repair - The Pitfalls Of Playing The Balance Transfer Game

Written by Mark Andrade

Thursday, 22 July 2010 19:38

by MarkAndrade

You might have found yourself tempted by the endless credit card offers hitting mailboxes with regularity, even during the recession. Low interest rate offers and the chance to shift balances can be hard to resist for some in this economic climate. Before you take advantage of one of those offers, check out these facts to see who ends up benefiting the most.

Interest Rate Dance

Lots of people take advantage of seemingly hard-to-believe credit card offers. The plan is to refinance their credit card debt before the teaser rate goes up - usually substantially. However, what usually happens, and the credit card companies count on it, is that people either forget or are unable to transfer their balances again.

Balance Transfer Fees

Credit card companies routinely charge 3% - 4% to transfer balances, and sometimes even up to 5%. Any interest rate advantage you might have thought you had could be quickly eroded with fees that high.

Beware the Cost of New Purchases

Don't think you've got it made if you got what seems like a good deal on your balance transfer. Credit card companies will just make it up on what they charge you for new purchases, often charging a much higher interest rate on them. Then, standard practice is to apply payments first to the lower rate portion of your balance, then to the highest rate portion which is usually all your new purchases.

Don't Believe the Pre-Approved Offers

Watch out for the often heavily promoted pre-approved offers being sent out these days. You might find that once you take the bait and sign up for the offer, you don't really qualify after all. Instead, you're signed up for a less attractive offer and with all the hype, you might miss the details.

Ditch the Add-Ons

The recession and unemployment has given more consumers the desire to add debt-suspension or debt-cancellation contracts to their credit accounts. Appearing similar to insurance, lenders have designed these unregulated contracts simply to collect more fees. With considerable restrictions, they are hard to collect on and ridiculously expensive.

The Effect on Your Credit Score

Playing the balance transfer game can damage your credit score in several ways. First, just the act of applying for new credit becomes a strike against you. Lenders do not like to see it when you appear to need more credit. Secondly, transferring a balance from a high-limit card to a lower-limit card is another strike against you because your debt/unused credit ratio goes up. And lastly, if, like most folks, you end up closing your old account when you open your new one, that counts as another strike against you as it further increases your debt to available credit ratio.

Balance Transfers the Right Way

The key to taking advantage of balance transfer offers is to focus on using the low rate to quickly pay off your balance, rather than charging up more debt. Used correctly, they can help you eliminate your credit card debt, despite the potential pitfalls.

Your priority if you accept one of these offers should be paying off the balance, or as much as you can, before the teaser rate expires. Taking a disciplined approach both toward spending and paying off your balance by making payments higher than the minimum, will slowly but surely get you the results you want in paying off your debt.

DISCLAIMER: This article is provided as information only and is not to be taken as financial advice.

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