In 2004, Americans paid $412 billion to credit card companies in finance charges. If you put money toward this huge amount, you might think about a balance transfer with no interest to lower your monthly payments. You might also think that this is an easy choice and that you should choose a card with no interest over one with interest. Well, before you decide to jump from credit card to credit card as a way to exercise this month, there are a few things you should know about balance transfers.
Fees for transferring money. Many balance transfers will cost you a fee of between 3% and 5% of the amount you want to move. Many cards limit this charge to between $50 and $100, but some don't. If you have one of these cards, your charge could easily cancel out the savings you get from a lower interest rate.
Universal Default Clause. Many credit card companies follow this rule, so you should be aware of it. Under this policy, if the cardholder is late on any of their bills, like their cell phone, electric, or car payment, the credit card company can immediately take away the promotional interest rate and charge a higher rate.
The * and the fine print. Be sure to read the small print and look out for symbols like an asterisk* that mean something is optional. Many offers of 0% interest are only given to people who meet the requirements, such as those with good credit. When you apply under these terms, be careful because you might not qualify for the 0% interest rate and end up with a rate that is even higher.
Spending more money. Find out if the 0% interest applies to new purchases, because this will have important effects. If the interest rate on new purchases is 0%, then you can relax. If they don't, you should know what will happen. Let's say you transfer $5,000 and then spend $500 on more things. Any payments you make will first go toward paying off the $5,000, while the $500 will earn interest at the higher rate until the $5,000 is paid off in full. That $500 could end up costing more than what you saved by transferring the balance. ** It's important to remember that the fee for transferring a balance is usually counted as a new purchase.
But don't give up! Balance transfers are a powerful way to manage money if they are used correctly. If you follow these steps, you will beat the house every time.
Put an end to The Old Card. Do not give in to the temptation. You don't want to be wrapped up in them again, just like you don't want to be wrapped up in the arms of an ex-lover you're trying to leave.
Put an end to The New Card. If your main goal is to pay down the balance, cut up the new card as well. That way, you won't have to worry about interest charges on new purchases. Just pay off your debt with no interest added.
Pay your bills when they're due. Don't let the universal default clause catch you. If you pay all of your bills on time (phone, car, mortgage, etc.), you can keep your 0% interest rate.
Call your credit card company. When your promotional rate ends, call your credit card company and tell them you're going to transfer your balance if they can't give you a low interest rate. Only then should you switch to another card. It won't be 100%, but it might be much safer than getting a new card and going through this risky process again.
