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!
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