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Balance Transfers and Low Rate Credit Cards

Black Belt Shopper (featured column)
by Larry Wiener

Ultra low rate credit cards are tempting, but can be a trap. Consider all the caveats before you jump into them.

You have a $5000 credit card balance at 15%. You're making only the minimum payment. You get yet another one of those 1.9% teaser rate cards in the mail. You're tempted to transfer the balance. Should you?

If you're like most people with balances, the answer is probably not. If all goes extremely well, you may pull off paying off the balance without any disasters. But, if disaster hits, look out.

At the very least, consider the following:

Is there a balance transfer fee? Some low rate cards will charge a balance transfer fee, maybe 2% or 3% of the balance, often with a minimum that may be more than that if your balance is relatively small. That could eat into your savings.

How long does the promotional fee last? Some of these "low rate" cards only allow you to keep the promotional fee for three to six months. After that, the interest rate goes up considerably.

You may think that if you're really organized, you'll find another low rate card before this one expires. You may or may not be able to do that. You may or may not remember to get the new card before you have to pay the "standard" rate which is much higher. Then if you have a month or two of the standard rate along with a balance transfer fee because you can't find a card that doesn't have one, look out. There goes your savings.

What about the grace period? Many of these promotional cards have very short grace periods and large penalties if you are late. Additionally, with most of these cards if you are late only once, you lose the promotional rate and then have to pay a standard rate.

Consider the effect on your credit record. If you become a rate hopper, this will show up on your credit report because there will be a large number of inquiries and other evidence. If you want another type of loan down the road, many of the best institutions will balk at lending to you if you are a rate hopper. They are afraid you will jump ship before you have an opportunity to be profitable with them.

Will having one of these cards tempt you to overspend? Sometimes the reason a person is seeking out an ultra low fee card is because they got into credit card debt by being a big spender. If this is the case with you, will having the low-fee card tempt you to get into the overspending habit? Shopaholics and debtaholics may be tempted to spend more if they have a low fee card rather than taking the steps necessary to curb their spending.

Are you ready for all the marketing that comes with low rate cards? You may think of your banker as a stuffy little man in a three-piece suit and glasses who likes to figure out ways to say no. Beneath that facade, however, is a marketer. If you take the low rate card, be prepared for hordes of marketing, both from the banks and from outfits who buy customer lists from the bank. How good is your sales resistance? Are you willing to be bothered by phone calls at dinnertime in order to take the low rate.

Let's face it. These credit card companies don't offer the low fees because they love you and want to do you a service. They offer them as a come on, hoping that you will become more profitable to them either by slipping into a higher rate category or by buying something else from them.

Going with one of these low rate cards may be in your best interest, but quite possibly won't be when you consider all the caveats.

So what are the alternatives to the mass marketed low rate card?

Let's say you have a $5000 balance and you can budget a payment of $100 a month on a 15% card. You will pay that off in a about 6 and 1/2 years and pay $2,896 of interest. Not too pleasant and it does make those low rate cards tempting. There are other alternatives.

There are some banks that will allow you to transfer balances at a rate not quite so low, but for the life of the loan. Let's say you find a 6.9% card for that $5000 balance that allows you to transfer for the life of the loan. In that case, paying the same $100 a month, you will pay the loan off in a little less than 5 years and pay $912 in interest.

If somehow you can find a way to pay another $25 a month, you will pay $698 in interest and be done in four years.

While paying $100 a month with a 2.9% loan will only cost you $335 in interest, the possibility of transfer fees, late fees, and the like may make the 6.9% card not that much more expensive and a lot less hassle and risk.

If you have a high interest card, sometimes you can even talk your own bank into cutting the rate.

Low cost cards are everywhere and there may be circumstances under which you might benefit from them. Before you sign, however, consider all the caveats.

When you do, there is a likelihood that they might not be for you.

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Copyright © 2002 by Larry Wiener. All rights reserved.

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