by Gary Foreman
Q: Can you explain all the hype and offers having to do with transferring amounts from one card to another or using checks at a very low interest rate? I get so many offers I figure there's a reason these credit card companies are pushing people to do it. I just don't know what that reason is. - Ellen
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A: Ellen is wise to ask why the credit card companies are begging to give her a good deal. Understanding what they get out of it can help her avoid unpleasant surprises later.
According to Credit Cards Magazine, credit card profits in 2004 were the highest they've been since 1988. Experts believe that the credit card market is 'saturated.' So on average for every new account an old one is closed.
The banks that issue credit cards are in a competitive battle for new accounts. And they know that not all accounts are equally profitable. The ideal customer uses the card often, is always paying interest on an account balance and pays the minimum amount each month without fail.
Banks are also worried about borrowers not being able to make their payments. So the trend is for credit card companies to segment their offers based on the creditworthiness of the cardholder.
Combine those two and you'll find the bank's ideal customer. They are aggressively going after customers who carry a balance, but still have a good credit record. As a result, Ellen gets offers for a low interest transfer.
The bank can make money on a low-interest account in a number of different ways. For instance, Ellen may be required to pay a 'balance transfer fee' of 3% or so to move the balance to the new card.
The bank knows that Americans charge $1.5 trillion per year. There's a small merchant fee on every credit card transaction. They like it when Ellen uses her new card.
They also hope that Ellen will continue to run a balance on her low interest card. Once the low interest period ends that they can charge Ellen 15% or more on the balance. It doesn't take long for them to make up any interest that they gave up to get the account.
Plus, the low interest offer may only apply to balance transfers. Any new charges Ellen makes could be at the regular interest rate.
And the monthly payments she makes will be used to pay off the low interest transferred balance first. That leaves the new charges unpaid to run up regular rate interest charges.
Ellen needs to read the fine print on the credit agreement. There are some additional dangers lurking that she'll want to know about.
The bank is concerned about delinquencies. So Ellen's low interest deal probably has a clause that would increase the rate if she's late on any payments. Typically called a universal default clause they allow the bank to raise her rate substantially if she missed a payment to any of her creditors. Not just this account. Any account. So Ellen doesn't want to get too cute waiting until the last minute to make her monthly payments.
She also needs to know that it's unwise to continually jump from one low interest card to another. Many consumers mistakenly think that's the best way to beat the system.
If she begins jumping she'll lower her credit score. Part of your score is based on how long your business relationships have lasted. Opening and closing accounts each year won't help. A lower score will make it more expensive for Ellen to borrow again (including auto and home loans).
The low interest transfer does offer Ellen an opportunity. It's a great time to pay down a credit card balance. That's much easier to do when you're paying little or no interest.
So should Ellen switch to a low rate credit card? If she hasn't done so in the past and reduces her balance it could save her some money. Picking the right card requires finding the best offer for her particular needs. That can be somewhat complicated. Ellen will want to use one of the web tools to help.
What's the bottom line? The banks offer low rate transfers because they know that they'll make money that way. And Ellen should only play if the transfer will make money for her, too.
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Copyright © 2005 Gary Foreman. All rights reserved.