Blog: Spirit of Money, Financial Fluidity
by munificent

Balance Transfer On CC's

Debt transfer or Paydown?~ another thought comes to mind~ Many Americans refied their home "to pay down debt", and deduct the transaction from their income taxes...Question: How many refier's took a vacation, or bought a new car..and WHEN (not if) interest rates rise to the constriction level-what will happen to the real estate market..the only real gains in town...what happens to the economy then? Certainly high interest rates constrict the stock market, except the fixed income sector (corp/muni debt)..what will our fatted calf economy act, taste, look like then? AND what will your home equity and your balance sheet act, taste, look like then?

Date:   7/29/2005 8:38:55 AM   ( 16 y ) ... viewed 1820 times
12 questions to ask about balance transfers
Thursday July 28, 6:00 am ET
Erin Peterson

Those low-interest credit-card balance transfer offers showing up in your mailbox almost daily -- some going as low as zero-percent -- are hard to resist. But read before you leap. The fine print, that is. You could end up paying more than you would have if you'd just stayed put.

That's not to say transferring balances is a bad thing. It's just that you should understand exactly what you're doing and figure out whether it's really good for you.

Here are 12 key questions to ask before you make the decision.

1. How long does the rate last? Typically, introductory rates last six months, and occasionally a year. Some last for the life of the transfer. So make sure you know how you intend to pay off your transferred debt. If you can pay it off during that interest payment holiday or super-teaser rate it may be a good deal. If not, think twice. If you know you cannot pay it off within that time frame, sit down with a calculator and work on different scenarios. You may find that if you haven't paid off enough of the transferred balance in, say a year, you're actually moving into a worse deal.

2. What are the minimum requirements to keep the low rate? Even a zero-percent rate comes with a price, says Gerri Detweiler, founder of Ultimate Credit Solutions. "Some cards may require you to make a purchase every month to keep the zero-percent rate," Detweiler says. You'll probably also have to pay your monthly bills on time every month -- and some may even require that you pay all your other bills on time, too. Be wary of broad default clauses that give the credit card companies the option of raising your rate at their discretion. "It's okay if the default clause lets them raise the rate if you make a late payment more than twice in six months," says Detweiler. "But I'd steer clear of cards that say they can raise your rate if they determine, in their interest, that your account carries risk."

3. What's the interest rate for new purchases? It may be the same low rate as the transfer, but don't count on it. If the rate is higher, you may also find yourself in for a shock when you begin to make payments. Any payments you make are typically applied to the lowest-rate items, which is exactly the opposite of what you'd normally want to do to get out of debt, says Patricia Hasson, president of the Consumer Credit Counseling Service of Delaware Valley. "If you transfer a balance to a new card, it should be a card you don't plan to use," she says.

4. Is there a balance-transfer fee? Typically, cards charge about 3 percent of the transfer, up to $50 or $75. "Add that into the interest rate you're getting to see if it will correlate into savings over time," says Hasson.

5. How is the average balance on the account calculated? Some companies use a two-month moving average, which tends to be detrimental to customers carrying a balance. Try to find a card that uses an average daily balance. Two-cycle billing means the interest for the current billing cycle is computed using the average daily balance over the last two billing periods, the current period and the previous period. If you carry a balance this usually means you will lose the grace period on your new purchases.

6. What will the rate be when it finally changes? Though you may not be able to know that rate with complete accuracy, see if you can get a ballpark figure, says Catherine Williams, vice president of financial literacy for Money Management International. "When you're dealing with balance transfers, you're really gambling," she says. "You're hoping you can find an equal or better rate when the rates change, and in today's rising interest rate environment, it's probably not going to be there."

7. What's the difference between a cash advance and a balance transfer? A cash advance allows you take money for any purpose, while a balance transfer is limited to moving your balance from one card to another. In some ways, says Detweiler, the two are similar: "There may be a fee associated with each, and interest typically starts accruing immediately -- there's no grace period." But the specifics for balance transfers and cash advances vary by card. A balance transfer might have higher fees with a longer low-interest period, while a cash advance may have lower fees and a shorter low-interest period. "Be sure to read the fine print," she adds.

8. What's the best way to transfer a balance? Not all balance transfers are created equal, says Detweiler. Transferring the balance directly by phone, using convenience checks or using a cash advance may have different fees and different rates. "I recently received an offer that came with four different convenience checks," she says. "Two had an introductory rate and two had a fixed-for-life rate." A Michigan reader recently reported he got a balance transfer order that boasted zero percent until paid off and no transfer fee. The mailing included several convenience checks, but he later learned using the convenience checks -- even for a balance transfer -- meant the zero-percent rate would be good for only six months instead of until paid off.

9. How are convenience checks treated? No matter what you use your convenience checks for -- whether you write one out to yourself, to a merchant to make a purchase, or to a credit card as a way of transferring a balance -- it will likely be treated as a cash advance. Sometimes, cards will provide special rates for these checks, but only if you use them to transfer a balance. "If you get a balance transfer check for zero-percent APR for six months and the fine print says it can only be used to transfer balances, if you write the check to yourself or used it for a purchase, you may actually be charged a different interest rate," says Detweiler.

10. What about new purchases? Unlike cash advances and balance transfers, purchases charged to the card will typically have a grace period before interest starts accruing.

11. Do you qualify for the lowest rate? If you're someone who has credit card debt, you may not be a preferred customer, which means you won't get the best rates, so be sure to double-check everything when you get your card. "Most issuers leave themselves the ability to secondarily screen your credit-even on a pre-approved credit card," says Detweiler. They may offer you a different rate if you don't qualify." Fortunately, you can cancel the card without penalty if you discover that you didn't get what you bargained for.

12. How is your information protected? This is a key question for anyone to ask when they apply for a card, but for those already in debt, it's particularly important. With hackers finding new ways to access personal account information, you want to make sure your credit card company will protect you so you don't have to deal with the hassle of identity theft on top of everything else. "When you ask that question, the answer shouldn't just be that they have seven encrypted firewalls," says Williams. "They should be able to tell you that they have a policy that you'll be notified quickly by both e-mail and snail mail."

Figuring out the best deal for you will require that you sit down and take some time to do the math. Understand what triggers higher rates, and don't forget to save all the paperwork -- and watch your mailbox for any change of terms in your account. "If you're faint of heart it's better to find a card an interest rate that fits your budget and stay there," says Williams. "Then pay down your debt."

Find out how long it will take you to pay off your debt -- and how to do it most efficiently -- using our debt pay-down calculator.

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