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.