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Use Caution when playing the credit card game

Q. I have 2 credit cards right now, one with a balance and one without.  I frequently get credit offers for 0-interest for 12 months, and I’m thinking about transferring my balance to a new card.  I figure I’ll save about $30 a month in interest charges.  Is there a downside to doing this?

A. The answer depends on how long you were going to take to pay-off the balance on your current credit card, whether or not the new card has a balance transfer fee, and what you plan to do with the old credit card when you pay it off. 

I’d encourage you to read the terms carefully before you decide anything. Start by finding out if you will be charged a balance transfer fee. Some cards carry a balance transfer fee as high as 5%, while others do not charge any fees at all.  If the new card has a balance transfer fee, this will be charged on your first billing statement after you transfer the balance.  Does this fee negate any interest you might be saving when you transfer the balance?

Let’s say your current credit card has a balance of $2500, and the new card has a balance transfer fee of 5%.  In this scenario, you will pay a $125 fee.  This is still less than the $30 a month in interest you are paying, assuming you planned to pay off the card over the course of the next year.  However, if you had planned to pay the card off over the next 4 months, you would not save any money, so it doesn’t make sense to move forward with the balance transfer.

Next, you must also consider what you will do with your other card if you pay it off with the balance transfer. If you continue to make purchases with it, then you will not get yourself out of debt, and again, you will end up negating any extra savings you might enjoy with the new card.  If you choose to open the new credit card with your balance transfer, then I’d advise you to cut up the old one.

In so doing, you won’t be closing the account, which would affect your credit score, but instead you are ensuring you will not go further in debt.  If you are concerned about destroying the credit card, put it in a bowl of water and freeze it.  You cannot microwave the frozen card or you will destroy it, so this keeps you from making impulse purchases.  In a few months, when you realize you do not need the card, you may be ready to destroy it.

Ultimately, if you use the new card as an opportunity to stop paying interest and pay off the old one, this would probably be a good financial move.  Still, if you are going to play the credit card game, you need to be careful.  Look at the whole picture, be honest with yourself, and then make sure that the end result of whatever you decide will be in your best financial interest.

Bonnie Spain is the executive director of Consumer Credit Counseling Service of the Black Hills, a United Way member agency. For more information, email credit@cccsbh.com.

The material in this transmission is provided for personal, non-commercial, educational, and informational purposes only. ACCE makes no representations or warranties with respect to the accuracy or completeness of the contents of this transmission and assumes no responsibility for errors, inaccuracies, omissions, or any inconsistency herein. You should consult a professional where appropriate.


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