PAUL ANDERSON: Understand dangers of transferring debt from card to card
| Friday, Oct 21 2011 12:00 PM
Last Updated Friday, Oct 21 2011 12:00 PM
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Paul Anderson
Don't you just love it when you open your mailbox and you find it stuffed with ads? Some of that pile of paper is likely to be low or zero percent introductory rate credit card offers. The envelopes scream out what a good deal can be found inside. A lot of times, though, these deals are too good to be true. Take some thought before acting on them.
Will the offer really save you money?
Although the rate is very important, it's not the only thing to use to guide your decision. You also need to check the offer for four other items:
* How long does the introductory rate last?
Often, the goal is to draw you in with the low rate so that you will rack up a balance, or transfer a large enough one, that the company can switch you to a considerably higher rate before you have enough time to pay it off. Make sure the introductory rate lasts as long as possible.
* Is there a balance transfer fee?
If you plan on moving your balance to a lower rate card to help you pay off your debt faster, that can be a smart move. Just be sure you're ready to shell out 3 percent of your balance, or more, up front, and do the math to see if that's even worth the trouble. Some cards have no balance transfer fees, but they are few and far between.
* What are the terms and conditions?
Read through the entire offer, including the teeny tiny print on the back of it. You might find that you need to make purchases to take advantage of the promotional rate. Also, you need to know the policy on late payments. If you miss one by even a day, it could cancel the promotion altogether, yet you are still stuck with the card at a default rate.
* Is the company issuing the card reliable?
Not all credit card issuers are created equal. You'll find some credit card companies with complaints on the web. Check the Better Business Bureau for reviews.
Dangers of overuse
Some people think it's a good strategy to use promotional balance transfer offers over and over again. When the promotional rate expires, they simply move their balance to yet another new account. Although this strategy can be a good way to pay off your debt at a low or no rate of interest, you will do some severe damage to your credit score if this is your sole method of keeping interest manageable.
Every time you apply for a credit card, you're allowing the lender to look at your credit file, which is referred to as a "hard inquiry." This is one of the determining factors in your score. The reasoning is that it makes potential lenders think you either have a tough time getting credit and that's why you have to keep applying for cards or you are unable to control your spending and need more and more credit lines.
If you cancel the card each time you switch to a new one, this doesn't make it better. Those hard inquiries still remain on your file -- for at least 12 months and often longer. Another factor in your score relates to the ratio of open credit (credit available for use) to your total credit limits. If you cancel a card after you pay it off, you are causing your amount of open credit to shrink. Cancel a card that's not paid off, and its open credit equals its available credit, which makes it appear to be maxed out -- even if it has a very small balance on it.
Planning to get a mortgage loan, an auto loan or another loan for a large ticket item? It's best to leave your credit card balances where they are and simply continue making on-time payments -- unless transferring those balances ONE TIME will allow you to pay them off in short order. Always remember that your credit past is your credit future.
Since they don't have a crystal ball, they look at your credit history and score to determine the risk that you will not be able to pay the money back. The lenders' worst nightmare is if you go into default and they don't see a dime. Higher risk equals higher interest, or a flat out denial of the loan.
Don't be seduced by glossy invitations. Take your financial future into account before jumping on one of those credit card offers. If you simply can't resist them, you can always opt-out of receiving these offers. This keeps the temptation out of your mailbox by removing you from marketers' mailing lists.
Paul Anderson is an investment advisor and partner at Moneywise Wealth Management. He is also a host of the Moneywise Guys radio program on KERN 1180 weekdays 10 a.m. to noon. His website is www.MoneywiseGuys.com. Securities offered through: brokersXpress, LLC, Member FINRA/SIPC/NFA a Registered Investment Adviser, Corporate Office: 311 W. Monroe St., Suite 1000, Chicago, Ill. 60606, www.brokersxpress.com, 888-280-7030. These are Anderson's opinions, not necessarily those of The Californian.
