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How to Make Credit Card Companies Work for You

Credit Wise (featured column)
by Jennifer Wallis

If you have decent credit, scarcely a day goes by without receiving a pre-approved credit card offer in the mail. The bold print screams "0% APR on all balance transfers!" but the fine print whispers "for six months... balance transfer fees apply." Is it possible to really get a good deal on any of these without falling into a trap? Yes, it is possible with a lot of discipline, a little know-how and a magnifying glass to peruse the fine print. I am going to share some great deals and how to take advantage of them while you avoid being suckered.

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Is 0% APR a good deal? It can be a great deal. If you have higher interest rate credit cards that you would like to transfer to a lower balance card, you can save a lot of money on interest.

What to look for: Look on the back of the credit card application or in the fine print of the offer on an existing card. See how long the lower rate lasts. Some are only 6 months and then go up to a higher rate. If you can't have the card paid off during that introductory period, pay close attention to what the rate will be once the introductory rate expires. If it is higher than what you are paying now, think carefully about switching. Also, pay close attention to any balance transfer fees that apply. Some cards charge 3% of the amount you are transferring as a fee. If so, you may want to think twice. People with the best credit get those offers with no balance transfer fees.

What if I get an offer for a low rate that is fixed until it is paid off? If you are considering transferring a balance, look for these deals. A low fixed rate until the card is paid off will save you the most money but try to find one without having to pay a balance transfer fee.

What to look for: Credit cards have one rate for balance transfers and another higher rate for purchases. If you transfer a balance at a fixed rate, DO NOT use it for purchases. The fine print will tell you that your payment will be applied to the portion of the balance with the lowest interest rate first. That means that if you have a portion of your balance with 5% interest (the balance transfer bargain) and another portion for purchases at 21% interest, every payment will apply to the 5% interest portion. In essence, the 21% portion of your balance will just sit there and rack up 21% interest until the other part is paid off. If you elect to transfer a balance, don't use it for anything else.

What about cards that offer rewards, bonuses, cash back and miles? Are they good deals? Keep in mind that if you don't pay off your cards every month, you are paying interest. If you didn't pay interest, you could probably afford to buy any of these rewards for a lot less money. You wouldn't need cash back because it would still be in your pocket instead of the credit card company's. Most cards don't give bonuses on balance transfers either.

What to look for: If you want to work the system, this is the place to do it but it takes discipline. The best way to reap the rewards without getting stuck paying interest is to pay the card off every month. If you do this, you get the rewards and don't pay interest. I have a friend who charges everything (gas, groceries, etc) on his credit card that gives frequent flyer miles for purchases. He pays it off every month and just sits back and laughs while he racks up free miles. Keep in mind that most of these cards set caps on their rewards so you will probably max out quickly.

What if I have to apply for a new credit card in order to get lower interest? If you are carefully watching your credit score, you know that applying for new credit could lower your score. If you want lower interest but don't want to open another card, you may have another option. Call your current credit card and tell them about the offer. Tell them that you'd rather just keep your account with them but that you have been offered lower interest. They may be able to match it just to keep you as their customer.

What to look for: If your current company won't work with you and you decide to transfer to the other lower interest card, make sure it's a better deal. Look in the fine print for an annual fees or balance transfer fees. Make sure it is a fixed rate instead of one that will go up quickly. Then, if you still want to switch, close your other card. Your credit score may dip initially but it is a good idea to close the card if you are tempted to use it again. If you are seriously concerned about your score, keep both accounts open and cut up the card to avoid using it.

What about those credit card checks that come with my credit card statement? These may not be a good idea. Again, you’ll have to read the fine print. Credit card companies are required to disclose everything so if there is a catch, you’ll find it in the fine print.

What to look for: Often, these checks may be treated as cash advances, which typically carry a fee and a higher interest rate. Read the disclosure to see if these will cost you more money.

What if I pay late? The easy answer is: Don’t! If you pay late, the credit card company may increase your interest rate. Based on something called Universal Default, if you default on one credit card by not paying on-time, your other cards may increase your interest rate, too, even if you never paid them late. This will make it MUCH more difficult to get out of debt. If you are behind on your bills and need help getting out from under the interest, you may need credit counseling. The National Foundation for Credit Counseling has agencies nationwide that may help www.debtadvice.org.

How to work the system in 6 easy steps:

If you have credit card debt that you are ready to get rid of and don’t know where to start, here’s how to get out of debt while paying the least amount of interest.

1. Stop using your credit cards.

2. Look for offers that promise low fixed rates with no transfer fees. Transfer a reasonable amount of your debt to these cards without getting too close to your credit limit.

3. Switch away from high interest rate cards. Ask yours to reduce interest if possible.

4. Once you have your debt on the cards with the best interest rates, figure out how much you can pay each month.

5. Pay at least that same amount every month. As cards pay off, roll money to another card to increase that payment.

6. This system can get you out of debt in 5 years or so... compared to 25 years by just paying the minimum payments.

You don’t have to be intimidated when you receive one of those long disclosures from your credit card company. Just be aware that somewhere in the fine print may be important information that you need to know. Be sure that before you agree to anything, you read all disclosures and know of any catch that applies. If you become better informed, you can use some of these credit card special offers to your advantage.

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Copyright © 2006 by Jennifer Wallis. All rights reserved.

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