At one point or another in time, you must have noticed the explosion of balance transfers in the market. No matter whether you are in USA, the UK, or even Singapore, the market would have devoured this product one way or another until it became too saturated for lender to continue their aggressive acquisitions.
Balance transfers are fundamentally transferring the outstandings you owe on your current credit cards to a new one, with hopefully lower interest rates. You basically draw funds from a new card to pay off your existing cards. Instead of naming this musical chair debts, calling it a “balance transfer” is a more marketable term.
These products typically target people with satisfactory credit and outstanding debt. These are the prime consumers that card issuers make the bulk of their revenues from. People who are cash rich don’t borrow. People who are poor don’t have the resources to repay. Leaving those in the sandwich middleclass to be the best targets. It’s not as if they are the perfect consumers, just that among the masses, they are the best for boosting the bank’s revenue.
They usually have healthy stable income which they are afraid of losing. They have a lifestyle they are unwilling to give up. Being on the receiving end of a bank’s collection activities is going to be a big embarrassment to their families and employers. And most of the time, they have submitted themselves to the rat race of making money just to spend it on necessary evils.
Balance transfers after all, do serve a benefit to some borrowers. But be mindful of the following booby traps associated with them.
Low rates only in the short term
That cold call you received from the salesperson would surely be blowing the trumpet on how low their interest rates are. This is true, but usually these “unbeatable” rates are only for the short term of between 3 to 6 months. After which they rocket skywards. Maybe even higher than what you are currently paying. Even though you will have the option to do another transfer of balance by that point in time, lenders are betting that you will either forget to do so, take more time to do so, or prevailing rates at that point in time make it unattractive for you to do so. It really is a game where you are playing with them. Some people inevitably will be victims to these strategies. Will you be one of them?
Processing fees
Before you even get access to the transfer funds, the lender strikes first with a processing fee of between 2% to 5% of the funds. This is directly debited from the funds, leaving you no room for any maneuver. If you had not done your calculations properly, these fees could potentially wipe out any saving you had expected to begin with.
Reduced grace period
It has almost become a culture all over the world that card facilities have a repayment grace period of 30 days. You would probably expect that to be the same with any balance transfer facility that you sign up with. Take note that this is not always the case. Read the fine print. If you are on an account with 20 or 23 day grace periods, surely you want to have a heads-up so that you can keep everything in check. Late payment fees can really be a pain in the neck.
Tiered rate for purchases
New purchases you make on the account could be subject to higher interest rates. And while you might think that your repayment would keep you at arms length from those rates, you should check the terms you sign up for. Because in some cases, the repayments you make could go into paying for the portion of funds with lower interest. Leaving you with the higher rate portions to service.
Your credit score takes beating
Going hardcore into balance transfers can be detrimental on your credit score. Some people call those who do this as a credit revolver. Meaning to take on other debts to pay off current debts. You will see how big an impact a lower credit score can have on you when you apply for bigger facilities like a mortgage.
Now even though we have talked about some of the hidden drawbacks of balance transfers, we cannot ignore the fact that they do serve serve strong benefits to some people in some situations. Here are some precautions you should keep in mind.
What else is there?
Introductory rates can be very attractive. And you must also know by now that going beyond those introductory rates can give your finances a real beating. If you are aware that you will surely not be able to repay the funds before the expiry of the introductory rates, consider alternatives. Some credit cards or cash lines can have attractive rates as well. An important factor is that they have consistent interest that does not rise over time. Depending on what you need, they could be more affordable in the long term.
Have a good credit score
Just like so many debt products, a good FICO score will qualify you for better terms or rates. The difference in charges can be multiple times between an individual with a good score compare to one with a bad score. With this in mind, you want to keep yourself out of trouble as much as possible on application.
Take note of the time where the introductory rate expires
You surely don’t want to get beyond expiry as long as it is within your power to avoid it. So mark the date on your calendar. Set a notification in your smart phone. Get you spouse remind you of the date. Make an effort to avoid getting into that zone.
Using a separate card for new purchases
If you end up with an account that has higher rates for new purchases, consider using a different card with a lower interest to make those new purchases. It’s not a lame move but a very smart one.