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Have you ever wondered why your mailbox if full of credit card offers from credit card companies offering to take on the balance of all of your other credit cards? Doesn't that plan seem to be nothing more than robbing Peter to pay Paul? Don't the credit card companies know that you are smart enough to realize there are not too many free things in this world?
Yes they do. The trick is in the financing. These deals are structured in such a way to make it appear that the credit card customer is getting something for nothing. But in reality, the credit card company is making their bones...and some of yours as well.
These zero=percent or balance transfer credit card deals are designed to lure the consumer in with promises of an easier credit card payment existence...but just on the transferred balance and just for a specified amount of time. The interest rate on new purchases is not charged that zero-percent or low interest balance transfer rate. Sometimes the rate on new purchases can be even higher than the card you transferred the old balance from.
But the zero percent balance transfer rate can be used to your advantage if you have all of the information going in. The plan requires another credit card with a low interest rate or a rewards program of some kind. But first, you need to know exactly how these plans work.
Balance Transfer Pitfalls
Basically, the credit card company will let you transfer the balance from your high interest credit card to your new credit card. For a specific period of time that transferred balance has a zero-interest interest rate and any new purchases you make on the card will be applied to your new credit card company's normal APR. This where the "look over there" method comes into play.
But you might not understand that new payments are going will be applied to the principal with the lowest interest rate - especially the sum you have transferred over to use the zero percent rate. To make it simple, you have to pay off that whole balance before the monthly payment could be applied to your new charges. Most credit card users do not know about this, yet it can lead to finance charges building up over time.
Using Balance Transfer Wisely
You should know about two possible ways to avoid this problem...one simple, one not so simple. The first way is to simply not make any new purchases on the new zero balance credit card until the transferred balance is completely paid off. The drawback is that you limit the ability to charge in an emergency. But this method requires thinking on your part. Just make the monthly payments on time and you'll be out of debt before you know it.
Then there's the not so simple method. This method requires more financial discipline on your part. Use two credit cards to pay off one card: one with a zero-balance transfer rate and one with a low interest APR or rewards program.
Lowering Your Interest Rates:
1) Find the zero percent credit card first. Ignore the cards that charge an annual fee or a transfer fee. Also, find the card with the zero percent rate given for the longest time period. These time frames can range from 6-to-15 months. Be very careful that you don't choose a credit card that requires a certain number of purchases every month (This where you get into the "robbing Peter to pay Paul" scenario). This is a scenario that could likely get you into a deeper hole than you were in before.
2) Make your own repayment plan with the zero percent transfer credit card. Set up your budget to pay off the entire amount before the zero percent runs out. If that's not possible, you can switch to another balance transfer credit card when the time runs out.
3) Find a new credit card with a low interest APR or a rewards program to pay for new purchases. If the plan is to pay off your credit card debt, and you can stick to a budget, a credit card program with a rewards program can help.
Overall, this plan requires that you become a dependable and responsible credit card consumer. The zero percent deal can be very enticing and tempting. But if you are not responsible about making your payments on time and keeping the new purchases to a minimum, you could be in even deeper debt than you were before.
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Comments• eZine Comments... |
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Balance transfer is good only for sensible people who will be able to use a chance and change the situation. Otherwise it won't cause any good results and will lead to much more problems than you have had before.
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