Balance Transfers can be a Good Approach to Reduce Credit Card Debt
Balance transfers can be used to successfully lower your finance charges to the point that you can reduce your credit card debt quickly. In order to get the best rates, you have to learn the habits of your creditors.
Each credit card issuer has different strategies for keeping your business. Some credit card companies like to push multiple cards with low credit limits on you. This will not help you. Instead, you will need a credit card with a fairly high credit limit that can handle the bulk of your credit card debt.
Selecting your creditor
Keep in mind that some creditors offer much better balance transfer terms than others. Avoid offers that carry balance transfer fees. These are typically 3% of the transfer amount, which can be substantial. Also, promotional rates that increase after 6 months will likely not do any good unless you can pay down most of the balance before the increased rates are implemented.
It is better to use one of your existing cards rather than getting a new one, provided that you are getting the proper offers. There is a process for setting your credit card issuer up for a better offer.
Putting yourself into position
The best balance transfer offers go to those who show the greatest financial strength. This is accomplished by sending much higher than minimum payments to that creditor for at least three consecutive months. If your minimum payment is $100, send them $250 the first month, $300 the second month, and $350 the third. If you have the ability to send more, do so. This escalating payment pattern shows increasing financial strength. It indicates to your creditors that you have higher permanent income.
Credit card issuers freak out when they see you rapidly reducing your balance. They see you as a lower credit risk and as a potential lost customer. They do not make money when you eliminate your credit card debt. Their money comes from finance charges and nuisance fees. It is worth it to them to lower your interest rates in the short term to keep your balance higher, with a promise of collecting higher finance charges and fees should you show financial weakness in the future.
Accept the offer
Once you have identified a good offer, complete a balance transfer from one of your highest rate cards. This will allow you to put more of your payments toward the principal balance and pay the balance down faster. If you have multiple cards, you can transfer multiple balances using the same offer. Never exceed 80% of the credit limit for that one card though, as it can set you up for an over-the-limit situation.
Watch for competing offers
Expect the cards from which you transferred balances away to offer their own incentives. If these are not as attractive as your current rates, ignore them. If the terms are better, then you are ready for subsequent transfers.
Frequent balance transfers can have a negative impact on your credit score. However, the whole point of better credit is saving money when you borrow. If playing the balance transfer game is saving you substantial money, then it is probably worth the negative impact on your credit score. Remember that your score will improve as you reduce your balances.
Credit card issuers refer to those who frequently use balance transfers to gain the best offers as gamers. These are the cardholders that have figured out how to take full advantage of credit card offers to pay less in interest than anyone else. How much less is up to you. I have permanent balance transfer offers of 2.9% with no transfer fees on a card with a $25,000 credit limit. Getting an unsecured rate that is lower than inflation is a pretty good deal! But I earned this low rate because I play the game well.
Keep in mind that many balance transfer offers began changing in late 2006. The newest trend is increasing the balance transfer fee. This has gone from 0% with some, to 4% with many credit card issuers. In addition, the caps have gone up from $50 to $250 on several offers. This makes frequent balance transfers very expensive.
Eliminate your credit card debt
Getting the lowest rates can be fun and rewarding, but keep in mind that you are still paying money. In addition, carrying large balances can be risky if you find yourself in a crisis. Use this system to reduce your debt so that you can begin to build wealth instead. If you cannot seem to get attractive balance transfer offers, then you may wish to try an alternate approach to reduce interest on credit card debt.