Playing the Balance Transfer Game

Every day when you go to the mailbox there it is: another offer from a credit card company to transfer your high interest account to a lower or 0% rate with a different card. Should you take this offer? Can you lift the nagging burden of monthly fees, compound interest, and a heavy debt load by transferring your balance? The answer is a resounding maybe.

There are pros and cons to playing the balance transfer game. And those who don?t know the rules of the game will lose without even knowing that they are playing. The main reasons to consider transferring your high interest credit card balances are: short-tem relief, emotional relief, and long-term interest savings.

Transferring for Short-Term Benefits

Lower monthly payments: If you currently owe $3,000 on a card with an 18% APR, then it would cost you $275/month to pay off your debt in one year. If you transfer to a card at 0% intro APR, you can pay off the same card with monthly payments of $250 per month. So anyone struggling to meet their monthly bill will gain some immediate relief. So how can this be bad?

As with any short-term fix, you pay on the other side. First of all, beware of any balance transfer fees. Some card issuers charge a service fee when transferring balances over to your new card.

What a Relief: The emotional component of credit card debt is very powerful. For many consumers the idea of finally getting out from under the debt they have been carrying is enough motivation to grab at any attractive offer they see. Unfortunately, most people who latch onto balance transfer offers for this reason find themselves trapped by the same lifestyle choices that allowed them to ring up debt in the first place.

One down side of transferring your balance is that most people feel so much better they are ?freed? up to go out and start spending again. Also, most consumers who transfer balances will only pay the minimum balance, so it takes them more time, and therefore more money, to pay down the balance.

Playing the balance transfer game is a lifelong hobby, as you must constantly look for cards with lower rates, and constantly switch credit card companies, rather than ever paying off the debt.

Long Range Results

Impact on Your Credit Score: Unfortunately, one of the least understood rules of the Balance Transfer Game is the Credit Score Penalty. Every time you apply for a new credit card your FICO score is lowered. This is the score used by credit card companies and mortgage lenders to determine the rates they will offer you. So you may be transferring to a lower APR today, but raising the rates you will be offered tomorrow.

Interest Does Matter: The question that you need to ask is ?How can I ensure I am getting the best possible interest rates today and in the future?? As shown in the example above, your interest rate will have a direct effect on the amount of money you pay out over the years. Just don?t be tricked into thinking that you are locking in a lower rate when you transfer that balance. Balance transfers do not affect future purchases, and they are only effective for a set period of time.

So the way you handle your credit cards today is a better indicator of your long-term payments that the attractive rate dangled in front of you today. By the way, the same credit card company trying to lure you away from the competition today will be checking your credit score in about six months to see if they should raise your interest rate.

Bottom Line on Balance Transfers

Ultimately the bottom line on playing the balance transfer game is buyer beware. It is a game that may offer some short-term relief, but also stiff penalties for the uninformed. The smartest players will make their moves based on information, facts, and a plan for protecting and improving their future credit dealings.

Steven Moy is a contributing editor for various websites related to credit and personal finance. You can see some of his work at http://www.apexcreditcards.com and http://www.creditservicer.com