Hazards of Credit Card Balance Transfers

The offer looks innocent enough. It seems to be an offer too good to refuse. Your credit card has offered you a credit line increase to allow you to transfer balances from a high interest rate credit card to get an interest rate about 75% lower than what you are now paying. It is a simple process. Write a check on your credit line or fill in a couple of blanks on a form to transfer the balance from one card to another. In many cases, this does not turn out to be a good financial decision.

Transfers often have a fee attached to them that sounds low but actually can be more dollars than you expected.

The offer will usually state that it will cost you only 2 to 5 percent to make the transfer. If you are transferring $1,000, this amounts to $20 to $50 being added to your outstanding debt. If the interest rate is good enough, you may recoup this amount in a payment or two in monthly savings. However, if the special rate is only for 6 months or less, the savings can prove to be quite small.

Many of these interest rates are going to head back up before you expect it.

You need to check and see what the top rates for the cards are before accepting a temporary reduction to transfer balances. You may be moving money from a card that has a maximum rate of 22.9% to a card with a top rate of 32.9%. When the rate starts to climb, it will leave that 7.9% teaser rate in the dust. While a 22.9% rate seems high, it is still a lot less than the potential alternative. The higher rate card will regard your willingness to transfer money as a sign of potential credit weakness. If you get any type of wart on your credit report, that sky high interest will hit you before you know it. At the same time, now the lower rate card will be reluctant to give you a lower rate, too.

How you actually use that new credit is important.

When you received a nice credit line boost to enable that transfer, your overall available credit rose. Once the transfer is made, you have all of that open credit hanging around on the first card. The temptation to spend it is great. You need some new toys, a medical bill or car repair comes along, or just about anything else that you deem worthy. Before you can blink, you are hundreds if not thousands of dollars more in debt from your effort to save a couple interest rate dollars. Now, you are saving nothing and spending more per month paying your bills.

You may find yourself needing to shuffle money back and forth to keep rates low.

This never works as a way to manage money. You will discover that you will time the transfers to happen on due dates of payments. Many times you will not transfer the entire balance. This means that you are essentially paying one credit card payment out of the credit line on another card. You are charging your charge card payments. This is a recipe for quick and certain financial disaster.