Tame Your Credit Card Interest With Transfers


Paying down debt is one of the best steps consumers can take to get through a recession.

What's on your credit card is one of the most important types of debt to rein in. One way to get control over multiple cards with varying balances and interest rates is to transfer your balances to a new card with a lower rate. In fact, many cards advertise balance transfer rates as low as 0% for a set period, which is an appealing alternative to the annual interest rates of 15% or more.

But as is often the case with credit cards, the devil is in the details. If you are planning on a balance transfer to solve your revolving debt issues, here are a few things to consider.

Teaser rates don't last: Thanks to the Federal Truth in Lending Act, credit card companies are required to outline the card's fees and rates in a table called the Schumer Box. While the information has to be present in the table, it can be confusing, given the myriad of rates and percentages included in the summary. When you locate the table (often found under the "Pricing and Terms" section of the card's introductory materials), find the section that describes the balance transfer APR (annual percentage rate). There will be a number of rates listed, one of which is the 0% APR (or other low rate) that first caught your eye. That rate is the teaser rate, and it can last for just a few months or more than a year. After that introductory period, your rate will automatically switch to the card's higher regular rate.

Your credit score matters: Not everyone will be eligible for the lowest interest rates. In most cases, credit card companies take a tiered approach, offering consumers with high credit scores (in the 750 range) the best rates, and higher rates for those with poor credit history (in the low 600s). Which tier you qualify for is at the discretion of the credit card company, both at the time of application or at any point afterward.

Default rates can be steep: The credit card industry works under the concept of universal default, where a late payment on one card can lead to rate increases on any other card you hold. You may be less likely to miss a payment if you have a single card versus multiple cards, so consolidating your balances could help you avoid hefty default rates. But not all cards charge the same default rates, so check those before deciding on a new card.

Watch your debt-to-available-credit ratio: Part of your credit rating is based on how much of your available credit you have already used. The rule of thumb is to keep your debt-to-available-credit at around 30%. For example, if you have a $10,000 limit on a card, you'll want to keep the balance below $3,000 to avoid any negative impacts on your credit rating. Keep that in mind when choosing the overall credit limit on your new card, or which balances you want to transfer.

Reining in your spending and setting up a strategy to quickly and effectively pay down balances is still the best long-term way to resolve debt problems. But in the meantime, transferring balances to a low-interest card may help you repay debt more quickly.

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