Personal Finance Budgeting

In today’s financial market more and more people are turning to credit card balance transfers instead of the traditional home equity lines that they have been used in the past. During the refinance hay-day throwing a tax deductible line of credit on the home to wipe out the credit cards was a no-brainer. Nowadays, shrinking home values and a turbulent secondary market are causing most banks have to hold these loans as opposed to selling them. This means the HELOCS of yesterday are only available to those with impeccable credit who have an abundance of equity in their homes.

Luckily, interest rates are low and balance transfers are a pretty good alternative if your credit card debt is out of control and need some help. This being said there are a few things that you want to look out for when transferring credit card balances from one card to another. The golden rule is that when you use a balance transfer card as an avenue to pay off balances on your other cards let this be your sole purpose. Make a budget and timetable to pay off the debt where there is a beginning and an ending payment otherwise you may get yourself into deeper debt.

Things to look for when transferring credit card balances:

Life of Balance Transfer cards – Life of balance credit cards are just what their name implies, they offer a low rate that applies to the balances you transfer within a certain time period. What you want to look for is a fixed rate that will not fluctuate over time. Depending on your credit level these may not be available to you, however if they are we highly suggest that you seek these cards out. The “gotcha” with this class of cards is that they usually will give you an extra thousand or two on your limit in hopes that you spend it at a higher interest rate, and most people do.

Again, we suggest that you use balance transfer credit cards for the single purpose of transferring higher interest credit card balances to a lower fixed rate. Once the transfer is completed, we recommend that you shred the transfer card and the one you transferred from to keep yourself from using them again. Over 75% of people that transfer balances use the transfer card and the old card again and end up owing more money than they did before the transfer. If the cards do not have an annual fee keep the accounts open for emergencies but shred the cards to keep yourself honest.

The Fine Print – If credit card issuers are similar in one area it is most definitely their fees and the fine print. It seems like they have fees for everything including one for on-time payments. Seriously you need to read the fine print and weigh the fees that apply for balance transfers, late payments, grace periods and other “gotchas” like universal default clauses. Over 80% of people that apply for credit cards will not read the fine print from beginning to end only to be surprised when their bill arrives in the mail. Most credit card websites offer handy calculators to help you calculate the best deal considering all of the fees.

Most credit cards have reduced the grace periods for repayment from 30 days to 20 days in an attempt to earn more fees and interest. If you are like most people, including yours truly, you pay your bills at a certain time of the month that usually coincides with your pay periods. The problem with this is that the 20 day grace period is relative to the due date of last month’s charges and is forever changing. If you pay your bills once a month like I do this will cause you to get late payment fees and could even trip the universal default clause which brings me to my next topic.

Universal Default Clauses – A universal default clause is a nasty little trick that credit card issuers use to jack-up your rates and fees to intolerable heights. If you look at the top of the fine print on each credit card you will usually see the regular APR and one below it that is through the roof. The one below it is the rate you will get should you pay late or even if your credit deteriorates. These clauses range from annoying to nasty and most states are trying to outlaw them but the majority of credit cards still have them.

The only card issuer that I can think of that doesn’t have this clause across the board is Capital One. I’m sure there are others but the clauses differ from issuer to issuer and card to card. Read the fine print for each card you are considering, see what their rules are that will trigger this clause. Some are mild which apply only if you are habitually late, where others monitor your credit and can jack up your rates and fees if your credit is deemed riskier than when they issued the card.

Introductory & Variable Rates – Beware of the asterisks. When you see one of these next to an interest rate you can bet it’s going to change on you. Most cards will advertise 0% interest on balance transfers 12 – 15 months but have cute little asterisks next to the rate. Find the fine print; chances are that your sexy 0% rate is going to morph into a giant wallet munching monster after the intro rate is over. Find out what the adjusted rate will be.The “gotcha” here is that most people know their rate will adjust in the future but they rationalize the transfer thinking that they will have the balance paid off in that time frame. Chances they won’t and the credit card companies know this. How else do you think they can offer 0% interest rates?

Variable rates are almost inescapable because 95% of all cards have variable rates. The ones that do not have them are hidden deep within most websites and offer very few frills. The reason they are hidden is that they are a little tougher to qualify for and offer lower profit margins to the issuers. When searching credit card websites take an extra minute to go all the way to the last page in each category, you may be surprised what you will find. Most credit card websites are arranged with the most profitable credit cards on the first few pages, these are rarely the best credit cards.

Reward Cards – If you are using your balance transfer card as you should, the bells and whistles on reward cards shouldn’t concern you. The bells and whistles cost you more, period. They cost the issuer more and they pass the cost right back to you. If you stay true to the purpose and transfer your balances in order to pay them off you should get a plain-Jane generic card without the usual frills hat comes with most cards. The only frills you should seek are the life of balance feature, fixed rate and a manageable or nonexistent universal default clause.

In closing I hope these tips help you get your very best deal should you decide to use a balance transfer card. This category of credit card is becoming more and more popular every day due to the financial chaos surrounding us today. This is generally a good thing though; this causes the card issuers to come up with different cards that offer better deals to keep up with their competition. Just remember the golden rule, only use balance transfer cards with a specific plan to pay off a balance. If you are “robbing Peter to pay Paul” the credit card companies will usually win in the end. Remember, Las Vegas wasn’t built on winners and neither are large credit card companies.