The Hello Bar is a simple web toolbar that engages users and communicates a call to action.

Balance Transfers: A Financial Shell Game

by Derek Sisterhen on April 5, 2010

Remember when you could charge a bunch of purchases to a new, low-rate credit card, and when the promotional period ended, you could then transfer the balance to another new, low-rate credit card?

Thanks to the recently passed CARD Act, that shell game will likely become a vestige of yesteryear when credit was easy to come by.

The upside to balance transfers is pretty clear: you get a lower interest rate (even zero percent) for six or twelve months. The balance sits there as you make minimum payments, chipping away at the principal. (We’re offered is opportunity for just a small balance transfer fee, probably in the neighborhood of 3%, and we ignore that the fee is really prepaid interest.)

The downside to balance transfers is two-fold.

First, there’s a false sense of security. Five years ago, no one would’ve even remotely thought that the easy credit would dry up, or that “lending” and “standards” would actually appear next to each other in the same sentence. We got used to finding another piece of plastic waiting in line to bear our balance transfer burden. Now, those with phenomenal credit who’ve never missed a payment are finding the well dry and a deluge of double-digit interest rates ready to pour forth.

Second, the debt isn’t going away. When focusing so much energy on finding a new card to transfer a balance to, we miss out on the fact that the balances need to go away entirely! Holding unsecured debt is a recipe for disaster. By its very nature, unsecured debt is considered risky. This is why lenders charge 30% interest rates – they must be compensated for that risk. In order to make the risk of high interest rates (and therefore high payments) disappear, the balances have to disappear.

Rather than play the shell game – moving credit card debt from one account to the next – develop a plan to dump this debt quickly and get on with life.

  • http://www.learningparenting.com/ Jenny | Learning Parenting

    Hi Derek – I like your article. Speaking as a person who used to have credit card debt, this subject is now one of my favorites. It also drives me crazy when I hear about people who keep playing the transfer game but conveniently forget they also have to pay off the balance(s) they keep transferring.

    Like you said, there has to be a PLAN to pay it off. I was very young and naive when I got my credit card and racked up the debt, and I just continued to make minimum payments.

    Then, as I started to wise up, I developed a plan. No more eating out – all that money goes to the cc. I think the smartest thing I did was set up online bill pay. That gave me the ability to make a payment at any time…I didn't have to wait for a statement to come in order for me to send in a check. If I noticed my checking account had some surplus on any random day, the money went to my cc bill pay. Best plan I ever had, and now, besides my mortgage, I am happily debt free. Biggest weight off my shoulders!

  • http://pastdueradio.com/ Derek Sisterhen

    Hey Jenny – thanks for the great comment! What a novel idea, having a plan! Unfortunately, for too many people “plan” is just another four-letter word.

    Way to use your resources – like online bill pay – to assist you toward dumping the credit card debt. I imagine you don't miss those payments one bit!

  • http://www.learningparenting.com/ Jenny | Learning Parenting

    Hi Derek – I like your article. Speaking as a person who used to have credit card debt, this subject is now one of my favorites. It also drives me crazy when I hear about people who keep playing the transfer game but conveniently forget they also have to pay off the balance(s) they keep transferring.

    Like you said, there has to be a PLAN to pay it off. I was very young and naive when I got my credit card and racked up the debt, and I just continued to make minimum payments.

    Then, as I started to wise up, I developed a plan. No more eating out – all that money goes to the cc. I think the smartest thing I did was set up online bill pay. That gave me the ability to make a payment at any time…I didn't have to wait for a statement to come in order for me to send in a check. If I noticed my checking account had some surplus on any random day, the money went to my cc bill pay. Best plan I ever had, and now, besides my mortgage, I am happily debt free. Biggest weight off my shoulders!

  • http://pastdueradio.com/ Derek Sisterhen

    Hey Jenny – thanks for the great comment! What a novel idea, having a plan! Unfortunately, for too many people “plan” is just another four-letter word.

    Way to use your resources – like online bill pay – to assist you toward dumping the credit card debt. I imagine you don't miss those payments one bit!

Previous post:

Next post:

Derek Sisterhen on Twitter Derek Sisterhen on Facebook Derek Sisterhen on LinkedIn Past Due: Radio YouTube Email us