HOW TO FIX YOUR CREDIT

"Beware of Balance Transfer" by Justin Ripley 

Knowing the ins and outs of balance transfers

When I was in college, I got a summer job working at a call
center for a major credit card issuer. When I first got the
job, I thought it would be great. In an air-conditioned
office, I would be sitting down and talking on the phone. It
sure sounded a lot better than working on the construction
site in the hot summer sun. However, after six weeks, I could
no longer take the monotony of the job and the constant abuse
on the phone. (We were telemarketing, of course.) So, I quit
the job but not without learning a great deal about the
intricacies of the credit card industry. I also learned a
number of tips that can help save you money.

Almost everyone has a credit card, usually several, but it's
been my observation that most people don't really understand
how they work. The credit card companies, of course, prefer it
this way, as it makes it easier for them to make money on you.

You've probably received them. Calls or mail from credit card
companies, soliciting you to transfer a balance from another
credit card account to their credit card. It sounds like a
good deal. They tell you that you can move an existing balance
from your MasterCard where you might be paying 19% interest to
their Visa card where you will only pay 3% interest. They can
tell you how much you'll save in the very first month, and if
you're talking about a significant balance, the savings can
indeed be substantial. So, what's the problem? Why not take
advantage?

Trick 1: It's Temporary

The first thing you need to know is that the balance transfer
rate is temporary. It often lasts for only six months or maybe
a year. After this period, the rate will skyrocket to
something more like 19%. Most people know this though and can
plan accordingly to pay the amount off before the rate goes
back up. It's the most basic trick. In fact, I'd allege that
it's the one they want you to see. If you think you know the
trick you lower your guard, then they trick you again!

Trick 2: Those Devilish Details

"Payments will be applied to balances with lower APRs prior to
balances with standard APRs." That statement or something
similar to it will appear in the fine print of the offer. If
you're being sold a balance transfer over the phone, the
salesperson is actually required to say it. But what exactly
does it mean?

Generally, your credit card company distinguishes between
different types of card use and the associated balances. Let's
call these "buckets." The first bucket is the most common. It
is the bucket where all purchases on your card go and it is
almost always at a high rate of interest. When you go out and
buy a new HD television on your credit card, this is the
bucket it falls in. A month later, you get a bill, and if you
don't pay off the balance in full, you'll pay the high rate on
the remaining balance.

Bucket two is for cash advances. This is also at a high rate
of interest. Sometimes even higher than the purchase rate.
Some people are not aware of it, but you can actually use your
credit card to get money from an ATM machine in the form of a
cash advance.

Bucket three is reserved for balance transfers and it is often
a rate that is considerably lower than the other rates
available on your card. This is where you most often see those
3% or even 0% introductory rates.

So, this is where the tricky business kicks in. Let's say you
transferred $1200 from another card (Card A) to a great 0%
interest rate offered to you by a competing card company (Card
B). The introductory rate only lasts for six months, but you
figure you can pay it all off by then by simply making monthly
payments of $200. Instead of paying 19% on that balance,
you'll now be paying 0% and saving a bunch of money. Then,
after you make the balance transfer, you go out and purchase a
bunch of stuff at Wal-Mart and use that same card. Maybe you
also buy some gas. Heck, maybe it was an existing account and
you were already holding a balance on it.

That $200 that you pay will first be applied to the balance in
the 0% bucket. The balances sitting in the other buckets don't
get paid off at all, and thus grow by the rate of interest
being charged. The credit card company has effectively set up
a barrier preventing you from paying off those balances that
are at higher rates of interest. Until you pay off all of that
balance transfer, you will not be able to pay down the other
balances. It's very tricky indeed.

A Few Other Things to Watch Out For

If you miss a payment, the introductory rate will be lost and
revert to a much higher rate. Also, look out for fees that may
be associated with the balance transfer. Often there is a one-
time charge of $75 or more to transfer a balance.

To Transfer or Not to Transfer

Balance transfers are not all bad. If used correctly, balance
transfers can be an awesome tool for saving money on credit
card debts. You just need to know the ins and outs of how it
all works. The credit card company relies on the fact that
people don't understand the intricacies. Do you think they'd
make any money giving people such low rates? However, if you
do understand the tricks and the pitfalls to avoid when using
them, you can save yourself hundreds or even thousands of
dollars!

- If considering a balance transfer, be sure that you
understand all the tricks and the pitfalls. It can be an
awesome tool in your financial arsenal ... if used correctly.
- Compare various balance transfer credit cards