Using Balance Transfer Offers to Repair Your Credit Can Backfire
Even during the recession, consumers continue to be bombarded with with seemingly endless offers for new credit
. These balance transfer offers often tempt you with initial low rates and the chance to move your debt to a new card. Beware: these offers can often become pricey debt traps. Here's some of the tricks to watch out for:
Incredible Rising Rates
Balance transfer rates often come with a short-term "teaser" rate that rapidly escalates with you footing the new, higher bill. Even if you plan to transfer your balance yet again, before the rate change, many forget to switch in time or simply are unable to find a better rate.
High Fees on Balance Transfers
It is standard practice in the industry to charge a 2-3% fee for the privilege of transferring your balance to another card. Those fees can quickly eliminate any interest rate advantage you might have obtained from the transfer.
Higher Rates on Purchases
Banks have to make their money somewhere and if you are giving you a seemingly good deal on balance transfers, usually they make up for it by charge a much higher rate on new purchases. To make things even worse, all payments are applied to the lowest rate portion of your balance first. So, the higher rate purchases are left to accumulate at a higher interest, until you pay off the balance transfer with the lower rate.
Pre-Approved Offers That Aren't
More and more often, banks are enticing consumers with heavily promoted "pre-approved" offers that frequently morph into something much different once you take them up on it. In this case, lenders hype their offer, but surprise, upon reviewing your credit, you don't really qualify, so they instead sign you up for another, higher rate offer.
Add-Ons that Can Add Up
Banks are finding consumers more and more susceptible to pitches for debt-suspension or debt-cancellation contracts with the recession and prevailing job insecurity most of us are facing. These offers sound like insurance, but are actually unregulated contracts designed by lenders to extract more fees. They're also ridiculously expensive and have considerable restrictions, making them difficult to collect on even if you wanted to.
The Unintended Impact 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.
The Right Way to Use a Balance Transfer Offer
If used correctly, balance transfer offers can help you climb out of credit card debt, despite the potential pitfalls. The key is to focus on using the low rate to help pay off your balance, rather than using it as an excuse to accumulate more debt.
Your primary concern with this approach 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.
Using Balance Transfer Offers to Repair Your Credit Can Backfire
By: Mark Andrade
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