Beware of Balance Transfers!

How many of us have seen those commercials and advertisements advocating paying off your credit cards faster by switching the balance of your credit card onto a lower interest card?   They call it a balance transfer and it makes perfect sense when they advertise these cards, transfer your debt that is being charged 19% interest on one credit card to another credit card at a lower interest rate, and eliminate debt.  It sounds too good to be true doesn’t it, remember that old saying about something that sounds too good to be true, it usually is!

In theory this tactic can work, but have you ever know banks or credit card companies to do something simply out of the goodness of their heart?   Let’s face it, the banks and credit card companies are in business to make a profit, they do everything feasible to keep you in debt for as long as they possibly can, not help you eliminate debt.    You have to remember these companies have investors to satisfy and if they’re making an offer like this there has to be some reason.  
So how are they making a profit?  The answer is they are counting on the fact that you can’t control your credit card spending.   In addition, they are hoping that you are like 99% of their other clients and when you get your card in the mail you take the card out and activate it without reading the terms and conditions.   So let me explain to you how most of these offers work.
 
Let’s say you sign up to a 2.9% introductory offer for balance transfers, what happens is that you will be charged that rate on the balance that you transfer over.  On any new charges that you make on your card you will be charged 19% interest, and then the other catch is when you make any payments they are applied to the balance that you transferred while the new purchases accumulate at a high interest rate.  This is how they make money, they count on the fact that most people don’t know how it works and don’t notice that while their original balance at 2.9% is going down, they are more quickly accumulating a higher balance at 19%.  By the time most people manage to pay off their balance transfers, they are back up to debt at the exact same amount they started with (if not more), at the same interest rate.

If you read the terms and conditions of your new card they do explain it in there in the finest print they legally can, buried in between 10 pages of other things.  However, now that you know how it works it is possible to outsmart the banks and beat them at their own game.  Balance transfers can be very useful, if you use them properly.  If you are going to transfer a balance over to another card what you should do is hide that new card and never use it, this is the only way that accepting one of these offers will pay off.  The other thing you should be cautious of is recharging your credit card, if you are doing a balance transfer the idea is to pay off debt and not get back into debt.  It is advisable that you write up a good budget and try not to bring your credit cards with you when you go out, if you learn to live off cash, you can eliminate impulse shopping.

If you are a homeowner and you are considering a balance transfer there are much better ways to eliminate debt.  You can speak to a mortgage specialist and talk about home equity loans, or lines of credit that allow you to borrow against the equity in your home in order to pay off debt at a low interest rate.  A mortgage specialist will help to figure out all of your options and find out which one will save you the most money, and help you get out of debt the fastest.