Using Balance Transfers to Repair Your Credit Can Backfire

Seemingly endless balance transfer offers are extended to those with good credit, and even sometimes to those without. The offers tempt you with low interest rates and a chance to shift balances to a new card. But do they really offer a good deal and who do they benefit most? Check out these facts before you take them up on their offer.

The Rate Dance

Credit card offers often come with a short-term “teaser” rate that quickly goes up, with you footing the new, higher bill. Even if you plan to transfer your balance again before the rate change, many people forget to switch in time or simply can’t get a better deal in time.

Balance Transfer Fees

Credit card companies routinely charge 3% – 4% to transfer balances, and sometimes even up to 5%. Any interest rate advantage you might have thought you had could be quickly eroded with fees that high.

New Purchases Will Cost You

Banks have to make their money somewhere and if you are giving you a seemingly good deal on balance transfers, usually they make up for it by charge a much higher rate on new purchases. To make things worse, all payments are applied to the lowest rate portion of your balance first. So, the higher rate purchases are left to accumulate at a higher interest, until you pay off the balance transfer with the lower rate.

Pre-Approved Offers That Aren’t

More and more often, banks are enticing consumers with heavily promoted “pre-approved” offers that can change once you take them up on it. In this case, lenders hype their great offer, but surprise, upon reviewing your credit you don’t really qualify. So instead they sign you up for another, higher rate offer.

Add-Ons Can Add Up

Banks are finding consumers more and more susceptible to pitches for debt-suspension or debt-cancellation contracts with the recession and prevailing job insecurity most of us are facing. These offers sound like insurance, but are actually unregulated contracts designed by lenders to extract more fees. They’re also ridiculously expensive and have considerable restrictions, making them difficult to collect on even if you wanted to.

The Unintended Impact on Your Credit Score

Playing the balance transfer game can damage your credit score in several ways. First, just the act of applying for new credit becomes a strike against you. Lenders do not like to see it when you appear to need more credit. Secondly, transferring a balance from a high-limit card to a lower-limit card is another strike against you because your debt/unused credit ratio goes up. And lastly, if, like most folks, you end up closing your old account when you open your new one, that counts as another strike against you as it further increases your debt to available credit ratio.

The Right Way to Use a Balance Transfer Offer

If used correctly, balance transfer offers can help you climb out of credit card debt, despite the potential pitfalls. The key is to focus on using the low rate to help pay off your balance, rather than using it as an excuse to accumulate more debt.

Your priority if you accept one of these offers should be paying off the balance, or as much as you can, before the teaser rate expires. Taking a disciplined approach both toward spending and paying off your balance by making payments higher than the minimum, will slowly but surely get you the results you want in paying off your debt.

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