Balance Transfers May Not Be The Solution To Your Problems

Photo credit: © gailanderson11

Are you in debt? Are you looking for a way to make it easier to make the payments while making a bigger dent on the principal balance at the same time? You may be looking into getting a new credit card and consolidating you balances with a 0% interest rate. On the surface, it would seem like a great idea, moving high-interest balances to a card that doesn’t charge any interest for a fixed amount of time. I hate to break it to you, but trying to do a 0% balance transfer to alleviate the pain of debt may not even be an option for many of you. Don’t get mad at me, I’m just telling you what some other writers simply won’t…

 

 

Many financial writers will gush about how money can be saved transferring balances from a high-interest card to a lower-interest one, and how much headway can be made. Unfortunately, it may just not be as easy as it sounds. If you are so deep in debt and far enough behind on your payments that your credit score is being adversely affected, you may just have eliminated this option from your list of options. Why you ask? There are 3 key reasons:

 

      1. If your credit score is negatively impacted by your spending habits on your existing credit lines, the odds are good that you will not even qualify for new lines. 

      2. If you aren’t in a bad enough position to be denied new credit lines outright, you will most likely be offered a low line of credit on a new card. 

      3. The advertisements you see are only for the most qualified applicants. You are not guaranteed to get those terms, and what’s more is you may not even qualify for any balance transfer at all. Balance transfers are not ordinary features of credit cards that are available to all holders. You may be offered a reduced repayment period, or a lower-than -normal interest rate, but the terms are decided on a case by case basis.

 

Please remember:

A balance transfer to a card with a lower rate will only postpone or temporarily slow the accumulation of interest. It will all be for nothing if you don’t learn to change your spending habits and learn to use the credit extended to you wisely!

 

Don’t forget, these days it is harder to obtain credit. Just because some bloggers and people in the media go on and on about how smart it would be to consolidate balances onto a low-rate card and how easy they make it seem doesn’t mean it will always be so. Digging out of debt is a long and arduous process and takes dedication as well as an ability to recognize bad habits while taking the steps to correct those deficiencies.

 

About Eric J. Nisall

Former NY'er, accountant & business consultant, founder of GreenBridge Advisors. Blogging about personal financial, small business topics, and other fun topics at DollarVersity. Fan of the NHL and everything hockey! Follow me on Twitter, Facebook, and on Google+

  • http://read-thatreviews.blogspot.com/ Rachel

    Balance transfers never really seemed like a good idea to me. I’ve noticed that most of them come with fees to transfer the money so the amount of interest saved doesn’t match the hassle of making the transfer even if you do qualify for it.

    • http://www.dollarversity.com Eric J. Nisall – DollarVersity

      I can see it being worth the hassle if the interest savings significantly exceeds the fees.  That being said, it usually only works that way if there is a high balance or interest rate, in which case the questions regarding qualification for new credit become apparent

  • Azra_ReadyForZero

    Absolutely True! Balance Transfers can be a great way to save money if you’re fairly reformed about your spending and can handle the temptation the extra line of credit provides. Doing some good math on whether you’re actually saving money in the long run and only applying to the offers for which your credit range has been pre-approved will help maximize on the transfer. Otherwise, you may be better off just going heads down and paying off that debt the old fashioned way.

    • http://www.dollarversity.com Eric J. Nisall – DollarVersity

      I think if someone is already in credit card trouble the odds are against them of being able to handle an freshly cleared line on an older account.  Not that all people are irresponsible, but aside from emergencies and job loss, there aren’t many valid reasons for getting deep into debt to the point of not being able to secure a new line.  Sometimes the best route is the most straightforward one: put your head down and push through as hard and fast as you can, like you said.

  • http://www.beatingbroke.com/ Beating Broke

    Another thing to keep an eye on is the transfer fee that the new card will often charge.  It can eat up the interest savings pretty quickly if you don’t watch out.

    • http://www.dollarversity.com Eric J. Nisall – DollarVersity

      Actually, depending on the details, it may not matter all that much. If you are going from a 20%+ interest rate to 0% or even 5% for that matter, paying a fee of 3% still puts a person well ahead.  Sure, it may not be ideal to have to add more to a balance that is difficult to pay, but if the interest spread is great enough, it may very well be worth it.

  • Andy-Investorz Blog

    I fell into that trap when I was young and racked up credit card debt.  I ended up charging my cards back up again so it wasn’t helpful at all.  I’m much better with my money now.

    • http://www.dollarversity.com Eric J. Nisall – DollarVersity

      That’s the biggest problem I see with the whole deal.  If someone is indeed able to secure an additional line of credit, all that will really do is tempt them.  I guess it really isn’t the credit card issuers’ jobs to make people use them the right way, but I can imagine it would make for great PR if they would do something to educate people.

  • http://www.oddcents.com/ Dannielle @ Odd Cents

    I’ve heard of people doing stuff like that, but I’ve wondered about how practical it is. But I guess with credit scores being so important, they seem to be the key factors which determine what you can or can not do.

    • http://www.dollarversity.com Eric J. Nisall – DollarVersity

      It can be quite practical, especially considering the fact that many of the credit card companies increased interest rates when the new Card Act came out.  If you only have to pay a 3% transfer fee to save 15% or more in interest charges, I’d say it could be a very practical idea.  It all depends on the person and whether or not they can take full advantage or if they will simply misuse the newly freed credit.

  • http://www.smartwealth.org/ Evan @ Smartwealth

    I thought about doing that when I was younger and had a big amount of debt, but I never followed through with it.  I would only recommend doing it if you can guarantee paying off the balance after the introductory rate expires and not transferring to another credit card 

    • http://www.dollarversity.com Eric J. Nisall – DollarVersity

      Absolutely Evan.  That and being able to adjust spending habits in the future as well