Charging Instead of Using Cash
It begins innocent enough. You charge for services or merchandise when you have the money to pay with cash or debit. Purchases using a credit card even though they may be little amounts if made several times a week, they can add up quickly. If your balances can’t be paid off each month mean paying the balances in full, then you should think twice about charging. These charges will add up and if you can not pay you will get yourself in a financial hole. So what do you do? You start looking at your interest rates to reassure yourself that you have it under control.
Interest Rates and Understanding them
You still believe that credit cards are offered to people for a convenience but the primary reason for them is to generate money to financial institutions that issue them. The credit card companies post interest rates in terms of an APR (Annual Percentage Rate), this APR that they offer from card to card.
As a consumer you should be trying to find the card with the lowest possible interest rate that you can. There are so many differences in the way interest can be compounded on the credit card that you receive. This compounded interest can affect the cost of the money you are borrowing. Interest can be compounded daily or monthly and credit card companies have different ways in which they calculate the balance on which the interest can be applied.
Your credit card debt is called revolving debt because interest that is earned on a principle balance is added back to the balance on which interest can then again accrue. A simple way this is put is the credit card companies earn interest on interest which makes paying off the balances of the credit cards a very costly and timely process for you and in turn very beneficial for them. Still thinking credit cards are a convenience? If so, you figure you can just compare and receive a balance transfer.
Balance Transfers can be bad
If you are transferring balances of your high-interest credit cards to the lower interest rate credit cards, this may seem like an effective way to get rid of that debt easier. This easy way out may be a good idea that has gone wrong. Transferring a balance onto a credit card with a low introductory interest rate can potentially save you money on interest if you STOP from charging on it and focus on paying off the balance before that introductory rate expires most of these rates are for a limited time and then go up to a much higher rate. The key is to STOP spending which most don’t and when this introductory rate expires you have more debt than you started at a much higher interest rate. You must read the fine print very carefully.
The Balance Transfer Trap
Low-interest balance transfer cards are a dime a dozen these days, but the big thing to remember is that those rates only last a few months and then you have to switch cards again to get a lower rate once again. The problem with this is you keep being charged balance transfer fees with each transfer, you can end up with multiple rates for that one card, and at some point these activities begin to appear on your credit, and you begin to look like a bad risk and getting credit will become harder. Now as these inquiries begin to appear, then the turndowns, you could be left with a high-interest rate credit card you were hoping to transfer to a low-interest card.
If you can handle swinging from balance-transfer to balance-transfer, make sure you formally close those accounts yourself, then notify the credit card company to annotate it as closed at customer’s request. If not, your credit report will look like the creditor closed your account. Thus making you look like an even worse risk, even when you’re doing your best not to be.
Balance Transfers Do End
Remember the childhood game, ‘Hot Potato’? That’s how balance transfers work. At some point, you will get saddled with that hot potato (large balance with the larger rate.) It’s fine at first to wear that 0% Badge; it makes you feel warm and fuzzy, it whispers to you that you’ve got ‘good credit,’ then it sneaks up. Once you can’t transfer anymore, you’ve got a maxed out account, lower credit score, higher interest rate, and higher monthly payment. Remember, banks are not in business to give money away, they are in business to make money.
So before you start doing this balance transfer “game” make sure you know what you are doing because this can be more harm than good in the long run.