Debt Prison

Transferring your high interest balance to a new, lower APR% credit card seems like a great idea. Credit card companies have dreamt up this thrifty method for luring you over to greener pastures. I’ve taken the time to review the positive benefits and negative risks associated with Balance Transfers. The cold hard facts should be considered before marching your revolving debt to a new bank. If not done properly you could end up in a worse position than before you made the transfer.

Why is a balance transfer necessary?

A debtor should consider transferring the balance on a credit card account if it can save them hundreds or thousands of dollars in interest. Finding yourself in this position is what I find repugnant. Poor financial planning and thoughtless spending causes us to obtain thousands of dollars of credit card debt and high interest penalties. Simply being in this predicament should force you to take a long look in the mirror. Unnecessary debt adds stress to our lives that is avoidable - why punish yourself and those around you with needless debt?

You need to make disciplined changes to your lifestyle to prevent this negative situation from reoccurring. Plan your monthly budget in advance; stop using credit for purchases and put cash aside for an emergency fund. High interest credit card debt only tugs you deeper into the abyss of struggling Americans fighting the battle against raging debt.

If you owe less than $1,000 don?t transfer the debt

Pay it off! $1,000 is a drop in the bucket and should simply be paid off immediately. Cut back on your spending or work a second job for three months. If you can’t pay off $1,000 in three or four months then transferring the debt won’t help you. Within a year you’ll find yourself in the exact same position, but with more debt. Chances are the credit card account you transferred wouldn’t get closed, and you may have another “emergency” which causes you to tap into the high interest card again. Make tough decisions now and pay that sucker off.

Many credit card holders keep a revolving debt of several hundred dollars on their card at any one time. When the bill comes due they pay whatever amount is necessary to keep their balance in the safe range of say..$500. What is the point in this? Why not just save up some cash and close the credit card account - using a debit card for online purchases and reservations? Hosting a revolving debt of $500 with an interest rate of 16% costs you $980 over the course of ten years. I can think of plenty of better ways to waste $980 than giving it to bankers.

Know the details of the Balance Transfer

So far you’ve done well. You’ve made all your credit card payments on time and your credit score is great. If so then realize that you can afford to be picky about which credit card company your debt is transferred to. Like me, you may receive many Balance Transfer offers in the mail every week. Take the time to read the fine print of each of them, your job is to find the best deal. Questions to focus on while looking through the Transfer offers are;

*How do they calculate their Transfer Fees?
Some charge a flat rate and others might charge 1 to 2% of the total transfer amount.
*If the new credit card company has an annual fee, how much?
*Is there a fee for becoming a new card member?
*Does the new introductory APR% apply to transfers and purchases?
*How long is the Introductory Period (usually 6 to 9 months)?
*What are the over the limit and late fees?
*If you make a late payment or go over the limit - what does your APR% jump up to?

Read the fine print and find the best deal for you. For example, if you can pay off the debt within a six month period then go with the card that has the lowest transfer fees. If it could take two years to pay off the debt then pick the offer that has the lowest APR% after the Introductory Period expires.

After you make the Balance Transfer

Don?t assume the Balance Transfer is complete until you see it in black and white. Continue to make minimum payments on the old card until the Balance Transfer is complete. To avoid complications request a transfer amount that doesn’t include a minimum payment. For example, if you owe $2,000 you may have a minimum payment of $50.00. Request the Balance Transfer amount at $1950. This way you can still make a final payment. The reason you want to leave room for a final payment is because the Balance Transfer can be rejected. If so, then your payments are still on time with the old Credit Card Company.

Recently I closed a Discover Card Account on which I owed $5,000. Weeks later I was still receiving Balance Transfer offers from Discover. Thinking this was their way to encourage me to reopen my account I accepted. They sent Balance Transfer checks which I wrote out for $2,000 to pay off a CitiBank card. Thinking that CitiBank was handled I failed to send them a minimum payment for the month of September. Discover Card rejected the Balance Transfer. CitiBank then charged me a bounced check fee and a late fee. I assume that Discover Card rejected the transfer because I had closed my account - so why were they still sending me Balance Transfer checks? I don?t know because I refuse to call them, my language could get out of line.

Close the old credit card account

Once the old balance is transferred you have the option to keep the old credit card or close the account and throw it away. Close the account! Having too many open accounts hurts your credit score because creditors see the opportunity for you to generate stunning amounts of unsecured debt. Not to mention you don’t need the credit anyway.

A recurring motif in my article is to stop using credit. People around the globe are uncertain of their future because of debt. You can’t build wealth when you’re surrounded by life sucking debt, it’s dangerous and irresponsible. Learn to pay cash and focus on savings, investments, and a future without debt. Currently I don’t even have a credit card - Ive stopped using them altogether. If I can?t afford to buy something I don’t buy it. I’ve noticed that when a person makes purchasing decisions based on money they’ve saved, they will spend less and look for bargains. Using credit encourages buyers to purchase new, highly priced retail products - look for the clearance rack!

Other uses for those Balance Transfer checks

Another interesting use for those Balance Transfer checks is to make the check out to you! Write out the check to yourself at 2, 3, or $4,000 and deposit it into a savings account. If the credit card company accepts the deposit you may have $4,000 in your savings account that is interest free for six to nine months. Pay the minimum payments, then when the Introductory Period is up pay off the account in total from your savings account. You could make extra money in interest savings using this method.

The most important concept is to get out of debt. Close the old account and pay off the transferred amount as fast as possible.

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Tags: balance, credit, transfer

This entry was posted on Friday, December 14th, 2007 at 9:59 am and is filed under Personal Finance. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.