In today’s financial market more and more people are turning to credit card balance transfers instead of the traditional home equity lines that they have been used in the past. During the refinance hay-day throwing a tax deductible line of credit on the home to wipe out the credit cards was a no-brainer. Nowadays, shrinking home values and a turbulent secondary market are causing most banks have to hold these loans as opposed to selling them. This means the HELOCS of yesterday are only available to those with impeccable credit who have an abundance of equity in their homes.
Luckily, interest rates are low and balance transfers are a pretty good alternative if your credit card debt is out of control and need some help. This being said there are a few things that you want to look out for when transferring credit card balances from one card to another. The golden rule is that when you use a balance transfer card as an avenue to pay off balances on your other cards let this be your sole purpose. Make a budget and timetable to pay off the debt where there is a beginning and an ending payment otherwise you may get yourself into deeper debt.
Things to look for when transferring credit card balances:
Life of Balance Transfer cards – Life of balance credit cards are just what their name implies, they offer a low rate that applies to the balances you transfer within a certain time period. What you want to look for is a fixed rate that will not fluctuate over time. Depending on your credit level these may not be available to you, however if they are we highly suggest that you seek these cards out. The «gotcha» with this class of cards is that they usually will give you an extra thousand or two on your limit in hopes that you spend it at a higher interest rate, and most people do.
Again, we suggest that you use balance transfer credit cards for the single purpose of transferring higher interest credit card balances to a lower fixed rate. Once the transfer is completed, we recommend that you shred the transfer card and the one you transferred from to keep yourself from using them again. Over 75% of people that transfer balances use the transfer card and the old card again and end up owing more money than they did before the transfer. If the cards do not have an annual fee keep the accounts open for emergencies but shred the cards to keep yourself honest.
The Fine Print – If credit card issuers are similar in one area it is most definitely their fees and the fine print. It seems like they have fees for everything including one for on-time payments. Seriously you need to read the fine print and weigh the fees that apply for balance transfers, late payments, grace periods and other «gotchas» like universal default clauses. Over 80% of people that apply for credit cards will not read the fine print from beginning to end only to be surprised when their bill arrives in the mail. Most credit card websites offer handy calculators to help you calculate the best deal considering all of the fees.
Most credit cards have reduced the grace periods for repayment from 30 days to 20 days in an attempt to earn more fees and interest. If you are like most people, including yours truly, you pay your bills at a certain time of the month that usually coincides with your pay periods. The problem with this is that the 20 day grace period is relative to the due date of last month’s charges and is forever changing. If you pay your bills once a month like I do this will cause you to get late payment fees and could even trip the universal default clause which brings me to my next topic.
Universal Default Clauses – A universal default clause is a nasty little trick that credit card issuers use to jack-up your rates and fees to intolerable heights. If you look at the top of the fine print on each credit card you will usually see the regular APR and one below it that is through the roof. The one below it is the rate you will get should you pay late or even if your credit deteriorates. These clauses range from annoying to nasty and most states are trying to outlaw them but the majority of credit cards still have them.
The only card issuer that I can think of that doesn’t have this clause across the board is Capital One. I’m sure there are others but the clauses differ from issuer to issuer and card to card. Read the fine print for each card you are considering, see what their rules are that will trigger this clause. Some are mild which apply only if you are habitually late, where others monitor your credit and can jack up your rates and fees if your credit is deemed riskier than when they issued the card.