Balance Transfers
Posted by Gail | Filed under Credit Wise
Very often I tell my fams that one of the ways to deal with high interest rates on existing credit cards is to apply for a lower-rate card and transfer the balance. When lenders were throwing credit this way and that, it wasn’t unusual to come home to find a balance transfer offer from some credit card company. And while transferring your balance from a card with a 28.8% rate to a 2.5% interest rate may seem like a no-brainer, there are a few things you should watch for.
The first thing to check is how long the lower rate will last and what the rate will be when the special offer period is over? Offer periods vary from six months to twelve, after which the card will revert to the normal (usually much higher) interest rate. If you can’t pay your balance off before the rate skyrockets, you may be stuck paying even more than before.
Note on your calendar, in your day book or in Big Fat Red Capital Letters on your wall the date that the special promotional interest rate ends and plan to either have the balance paid off in full or have a plan to transfer the balance to a cheaper option when the higher rate kicks in. The credit card company isn’t going to remind you, so if you don’t keep track you can’t go whining about what fiendish louts they are.
Make sure you understand what the low rate applies to. There are generally three type of transactions you can have on your credit card: a cash advance, a balance transfer, and purchases. Each of these transactions often has a different rate, with cash advances usually highest. If the offer you receive applies only to a balance transfer, do not make additional purchases on that card. Why? Because every payment you make will go against the balance transfer, leaving the new purchases to build up interest at the higher interest rate. Really! That’s what happens! Believe it!
Are there any fees associated with the balance transfer? Balance transfer fees are usually buried in the mouse print so read thoroughly before you make your transfer. Many people receive offers with no balance transfer fees and that will be clearly stated.
While you’re always supposed to pay your credit card on time, missing your due date by even one day on a balance transfer will result in the lender switching you automatically from the promotional rate to the standard rate, no ifs, ands, or butts.
If you do a balance transfer, you have to cut up the old card. Don’t cancel the account for six months so you don’t lose the credit history. But don’t fool yourself into thinking that you’ve taken care of the problem and that you now have even more “free money” to spend. This is one of the biggest traps of balance transfers. If you forgive yourself and don’t get a handle on your expenses – if you continue to think of credit as disposable income – then it’s only a matter of time until you’re pulling your hair out and running naked through the streets screaming!
Remember that credit card companies don’t make low-interest balance-transfer offers out of the goodness of their hearts. They know the odds are on their side that you’ll fail to pay off your balance on time, triggering the higher rate or neglect to switch your balance to another credit card when the promotional period is up.
Make sure you like the features of the card to which you’re transferring. A card with an annual fee is a card that costs more. Call it a fee, call it interest, the point of the transfer is to get those costs DOWN.
And please, please, don’t forget about your old card. Until you receive some sort of confirmation that the balance has officially been transferred, you still need to meet the next due date of your old card, or you risk getting slapped with a late fee.
March 10, 2009 at 5:44 am
When I was a single Mom I was queen of the balance transfer game, just to stay afloat. I recently did what I hope to be my last balance transfer though, because my income is changing to more secure but less. One of my credit cards has a regular rate of 5.99% that I’ve had for years, so I decided to take them up on their good offer to get rid of one balance that was about to go from the 1.99% 8 month rate to 18.99%. The original goal was to have that paid off, but, well, I didn’t obviously because I didn’t have a plan.
Thanks to you, Gail, and every single inspiring person that writes their story, their family’s story, their best friend’s story here, I have a solid plan that includes glitches and bumps…the ones that I didn’t plan on before that kept me in such a mess. I expect to be credit card debt-free in a little over a year, and will be loan free a couple of months after. I’ll have my TFSA maxed out for this year as well because even if I do get into some big financial doodoo again, I’ll atleast have that money to count on to either keep me going for a couple of months or to pay maybe the final chunk down on my cc as a Christmas gift to myself.
I can’t express how great it feels to go from overwhelming fear to overwhelming hope thanks to all of you. Keep on typing!
March 10, 2009 at 6:03 am
You are so right. There’s also another way you can get caught it you’re not careful. My mortgage was coming up for renewal last year so in the spring, I went to my investment advisor and asked about one of these Manulife mortgages where it’s like one big line of credit/mortgage and your pay goes directly on to the mortgage and pays off interest until you use it for other things. As it was explained to me, for as many days as you could keep your paycheque money in there, you’d pay off more of your mortgage and could end up paying it off years sooner.
Then the advisor said that the best way to make it really work was to put EVERYTHING I bought on a credit card – use it everywhere for everything -and then I could keep all the money against the mortgage until I had to pay the balance at the end of the month. He suggested I try doing this for 6 months and if I was comfortable with it, I could go into one of these mortgages when mine came up for renewal.
At first, it was OK and it sure was easier than carrying money around. But I found as the months went by (and I admit I wasn’t writing things down on an item by item basis, although I was using a budget), things started to get a little loose and although I paid my credit card balance off each month, by the fifth month, I had had to briefly use my line of credit twice to make the whole payment on time. I found it was too tempting to not say no to something on sale because it just went on the card. So in November, I told the credit advisor it wasn’t for me and went back to just spending in cash. It wasn’t all bad. I’d put so much of my stuff through on the credit card (it was one of those percentage payback cards) that I accumulated almost $400 in rebate. Still, it scared me to death to think that to do that, I must have put $40,000 through on my card!!
So lesson learned without a disaster but it was a real eye-opener.
March 10, 2009 at 6:35 am
Mom Blogs – Blogs for Moms…
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March 10, 2009 at 7:58 am
Great post, Gail.
It is amazing. When things really click they really click. We at one point were over 30000 in debt. After rolling that amount into our mortgage one year later we ended up with 2700 on credit once again. After agonizing over it and yes.. fighting over it… we decided to do a balance transfer with PC financial. .97 percent for 6 months. We diligently paid if off in 4 months. Why so different? We set our mind to it and got it done.
I did not allow myself to buy anything else on that card until it was paid off. I read the contract for the first time on the card and it FINALLY set in that I would be paying interest on my last purchase until the first purchase was done.
We are now debt free again and I buy nothing with credit that I can not afford. Now we just have to work on the 6 month savings.
It amazes me that this never clicked or made sense to me. That if I can not afford something now.. that I could not afford it when it cost 18 percent more a month either.
You have no idea how much you have helped us, Gail. Thank you.
March 10, 2009 at 9:39 am
I am hoping that I have made my last balance transfer as well. I have about $6000 on an MBNA card at 2.99% interest which ends at the end of July. I am working a second job now to pay that card off.
The balance transfers are great as long as you pay it off before it is due or find another card to transfer it to. The last couple of months have been great only paying $7 in interest but I have to remember to be diligent about it because that rate won’t last forever!
On a side note, my husband and I really need to replace our basement windows. They are so bad that you can feel a breeze coming through them! We have been setting aside $200 each a month to do this and when they install them in June we will be able to pay for them in cash!!! It’s a great feeling!
Thanks Gail for all of your help and support and just being a true inspiration!! One day I will be debt free and I will owe it all to you!! You are the best!!
March 10, 2009 at 10:05 am
Donna, that’s great – and congrats to everyone else who is finding a way to make it work.
One other caveat about the balance transfer that I wanted to mention. If you switch to a lower interest rate, don’t fool yourself that you can then afford to pay it offer more slowly! our mind can play some great tricks on us – the credit card companies depend on it!
March 10, 2009 at 11:04 am
You know all that you said is so reasonable!
Thank you for laying it all out for the lazy contract signers out there.
(There is ALWAYS fine print in favour of the lender — ALWAYS!!!!
Everytime I get one of those “generous” offers, I read the fine print, them I snort loudly in disgust and tear it up. Of course I have the luxury of having no balance to transfer…. all thanks to due-dilegence and listening to Gail’s wisdom.)
Triad to live by for financial security:
Spend less : Make more : Don’t ever spend more than you make.
(and the bonus lesson: you don’t DESERVE it until you’ve EARNED it)
March 10, 2009 at 11:53 am
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March 10, 2009 at 11:59 am
Pol*, when I get one of those ‘generous’ offers in the mail, I now have a system set up to dispose of them. I have a recycling bin at the front door. When I get home from work, I bring in my mail and and standing at the front entrance, I look at the mail and all mail that is junk mail, cc offers or whatever, gets torn in half before they are open and put into the recycling bin. It works well for me. When I used to be on a debt diet, I didn’t read the flyers that came in the mail, I didn’t go window shopping and I didn’t watch tv so that I wouldn’t be tempted by products. Even though, I haven’t really officially declared a debt diet in a long time, the habits I developed of not exposing myself to those offers have stayed with me.
March 10, 2009 at 12:50 pm
Those ‘generous’ credit offers drive me cuhrazy. A friend once said she mailed the blank forms back to the companies in the postage prepaid envelopes. I guess the companies then have to pay postage for them. She does it for junk mail too. I might start doing that too…we get at least three offers for credit cards a week!
March 10, 2009 at 2:21 pm
Christine,
I do that too! I mail the offers back to the company’s in the prepaid envelopes…been doing it for a while now actually. I guess Im not the only one, Im doing it to be a little spiteful I guess. I kinda tell myself that since they are trying to send me their junk mail….this is a way I can give it back to them (at a cost to them) lol.
March 11, 2009 at 8:44 am
@ Christine and Fiona:
I do that as well! I got the idea from an environmental group when I was in High School. There were a number of major magazines and papers getting their paper from a paper mill in my area that was clearcutting the last old growth forests in my province so we would go to the library and rip out all the subscription cards, write things like “Stop supporting the clearcutting of the Christmas Mountains” and send them to them postage paid by THEM.
http://en.wikipedia.org/wiki/Christmas_Mountains
March 11, 2009 at 9:06 am
in regards of sending back junk mail….
I used to do that too, because I got so pissed off with the junk mail from all kinds of places, but then I was told that this creates even more carbon foot print on sending them back. Companies don’t really care, as it’s computers that send it… it is all costed on the interest rates they charge. Best thing to do is ignore them all, and put on the recycle right away. Eventually companies stop sending it. I used to get the Visa from CIBC aeroplan forever !… I kept ignoring it, ignoring it….. I am not sure if that’s the best way to act with them. Also you will notice that when you start using more cash, and depend less on credit cards, for some reason, credit card companies don’t want to send you offers… as you are considered non-credit-interest maker…. They want people that tend to carry balances, instead of people that pay off their balance every time.
March 11, 2009 at 6:29 pm
Miche, Is that a short version of the river? Just wondering? I assume your talking about UPM?