Do you ever see those 0% or 2.99% low rate credit card offers in the mail?
Transferring balances can be a very effective cash management tool when used correctly.
If you are good at managing resources, it may make sense at times to pay off other secured or unsecured debt at higher rates by using one of these offers. Be honest with your ability and diligence to repay under any new assumptions. If you are not going to abide by the offer terms, don't change anything!
Be aware that suddenly transferring secured balances to max out credit cards could adversely affect credit scores.
For example, let's pretend you have bought a $25,000 piece of equipment with a 7 year note at 11.99% with $441.19 a month payments. Over the 84 month life of this secured loan, you will pay a total in principal and interest of $37,059.96.
Move that balance to a 2.99% for the life of the transfer offer and continue to pay within the offer terms the same $441.19 a month and the balance is paid in full in just 61 months. Now the payoff with principal and interest is only $26,912.59, you pocket the difference of $10,147.37. Plus, the credit card is not secured by the equipment, only your signature and ability to repay.
Wait, don't dig through the trash just yet looking for those offer (these should have been shredded, but that is another subject!). Here are some key questions to ask before you make the decision to transfer any balances:
- When does the transfer offer expire?
- How long does the promotional rate last? For the life of the balance is the very best.
- What are the minimum repayment or late pay requirements you must meet to keep the low promotional rate in effect?
- What's the interest rate for new purchases if you add any to the card in the future? Will payments for new purchases be credited to your account after the promotional balance has been paid in full so they accrue at a higher rate?
- What, if any is the balance-transfer fee? Is there a maximum charge?
- How is the average balance on the account calculated, daily, two cycle, etc.?
- If the rate is not for the life of the balance, what date will the rate change? What will the new rate be when it changes and the promotional period is over?
- Do you treat a cash advance and a balance transfer differently?
- What's the least expensive way to transfer a balance, or balances with this promotional offer?
- Before you agree to move anything, can you verify you qualify for the lowest rate on the offer solicitation?
- Can you set up electronic monthly bank payments for your specified payment amounts, not the minimum payment, to assure payments are always received within terms?
Just a few moments spent in exploring your debt management alternatives could save you thousands of dollars in unnecessary interest charges.
Amy Rose Herrick, ChFC, IAR is a Registered Representative of and offers securities and investment advisory services through, Woodbury Financial Services Inc. Member NASD, SIPC and a Registered Investment Adviser