Small Business Credit Cards

The Classic Traps Of Balance Transfer Credit Cards

By admin on December 29th, 2011

Balance transfer credit card is a great tool for bringing prosperity to our financial life. The concept of 'way cheaper debt' looks very attractive. But this tool is to be used with extreme caution; otherwise there is a risk of going into the debt trap and then the much bigger trap of bankruptcy.

You transfer all your debts to a single account where you will pay no interest or a very low rate of interest on your consolidated balance. When you are overburdened with your debt, you look forward to such a rescue. But remember, credit card companies are not working for charity. They may lure you with a dream of zero debt in a record time, but you need to be smart to avoid the traps on your way. Here are the famous ones -

1. Wrong timing - If you are going for a balance transfer when there is no credit available to you for even for small requirements, you may be tempted to use this new card towards fresh spending and this new spending will carry a very high rate of interest. In addition, all your payments will first be applied towards your old balance. This is because that old balance carries zero per cent rate of interest and the credit card company will apply your payments to clear the balance which has lowest rate of interest. Eventually you will add more and more debt to your new card with a very high rate of interest which will be impossible to control.

When you apply for a balance transfer, you should have another card with a small credit so that your small urgent needs will be taken care of.

1. Closing all your old cards - This is another mistake. You should never go for transferring balance on all your credit cards. If you do that, you will be closing all other credit cards which will hurt your credit score substantially.Select carefully the cards where you are paying already a high rate of interest and the credit limit is fully utilized.
2. Wrong assumptions - Sometimes your carried away by the attractive offer of card issuers and your tend to make unreasonable assumptions. You may assume that the balance transfer is done free of charge. In fact it usually carries a fee on the balance transferred. If there is no cap on such fee, an exorbitant amount may be charged to you. Sometimes the advertised rate of interest is applicable to only 'ideal' customers and you may not be eligible for such rate. So when you are charged interest, you will come to know about the effective rate much later. If there is very little difference between the present rate and the rate on such transfer, such proposal becomes uneconomical.Sometimes you assume that by transferring all your balances to a single account, you will remove all the adverse remarks on your credit report and then you can safely apply for a mortgage. The remarks will still remain on your report even though you close the cards. Also, your credit score may go down dramatically as a result of cancellation of cards. Finally you may not be able to get mortgage for which you made all such effort.
3. Ignoring your habits - Balance transfer is no doubt a useful tool to get rid of your debt, but much depends on your spending habits. If you transfer the balance on all cards to a single account, you will get some concessional rate of interest on that consolidated balance. However you may be tempted to use old credit cards again as they are now clean due to the balance transfer. If you are not a disciplined person organizing your debts systematically, you may end up creating additional debts and the total burden may be uncontrollable.
4. Forgetting the limited time period of balance transfer concessions - Zero per cent rate of interest is not for your lifetime. It may be for a period of six months or maximum up to one year. At the end of such period, you will be facing a very high rate of interest. If you are not careful to discharge all your debts within that limited time, you will be paying interest at a much higher rate, which may be more than your old rate. In such a situation, you start sinking further in your debt.
5. Failing to prepare alternative plan - You may be assuming that the zero per cent transfer is just a few days away as you have received an offer. However in this tight credit market you may be rejected also. In that case you should have an alternative plan like transferring all your debts carrying high rate of interest to a card which charges comparatively lower rate. You should be also prepared to speak to your creditors to reorganize your debts. If you receive a shock at the last moment, the feeling of frustration and helplessness may result in total inactivity about your debt clearing plan.Balance transfer credit card is a double edged weapon.Use it smartly with a clear mind to move to a debt free life.Credit cards have become a part of life. It's a great feeling to have them in your wallet. But if you continue spending recklessly, the burden of debt may become unbearable. Then there is one solution - zero percent balance transfer. It looks good but you should not make unnecessary haste. Go for it with a clear mind avoiding all traps on the way. How to do that? Chintamani Abhyankar provides practical tips while you go for such offers.