When my students ask me about learning personal finance without taking a class, my answer is, “Learn from your mistakes.” I realize how many financial mistakes I’ve made in my life as I prepare to teach each semester.
Even people in good financial shape are only a crisis away from making an unwise decision. Even me.
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How I Found Myself in a Bind
Following a change of job and location a few years ago, the confluence of multiple cash drains (one child in college, one in graduate school in an expensive city, rent on a home in the new city, and the mortgage on our unsold and empty house) and my temporary unemployment meant that our cash reserves were depleting rapidly.
Is a Balance Transfer a Good Idea or Not?
This was a time when the market was still recovering. As a result, liquidating investments to pay bills was not an attractive option.
The old house was on the market and needed work. I decided to pay for a major repair (several thousand dollars) with a credit card. When said credit card bill was due, I was looking at a balance transfer check with zero interest for six months.
Should I or shouldn’t I? In six months, the house would likely be sold — or the market would improve, or I would be working — and it would be no trouble paying off the balance.
I used the card, thinking I was doing a good job managing the cash flow. What I wasn’t very good at was reading the fine print!
I had written a check from one of the major credit card-issuing banks to pay for another credit card (drumroll, please) from the same bank. That’s a no-no!
Several days after sending off the check, the letters started arriving explaining why my payment was rejected. I took a hit with late fees, interest on the balance, and a credit score ding while still having to come up with the funds to pay this bill.
In the end, I would have been better off just paying down the balance on the first credit card over time with whatever interest rate they would have charged me: no late fees, no credit score impact.
Moral of the story: Balance transfer options aren’t the solution you think they are. If you use them, make sure you know what you are signing up for.
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The only situation in which the credit card balance transfer makes sense is if you’re carrying a balance on one or more credit cards with very high interest rates and can transfer the balance(s) to a card with a lower rate. You will be able to pay down the balance faster. This is your goal.
If you do this, don’t charge anything new on any of your cards! Transferring debt continuously from one card to another is not a smart thing to do, and it will destroy your credit.
As they say, the devil is in the details. This is true of balance transfers.
Read what’s in the fine print. The last thing you want is to dig yourself deeper into a financial hole. It can happen to anyone!
Mind the Fine Print on Balance Transfers
Here are a few examples of details you must pay attention to:
- While the stated interest rate may be low, there is usually a balance transfer fee that is the greater of a fixed fee, say $75, and a percent of the balance being transferred, say, 3 percent.
- If you’re even a day late in paying this off, you will be charged the normal balance transfer interest rate (higher than the interest rate on your purchases) for the full period.
- Any payments you make on your card in the interim will be used to cover your purchases first, and not the transferred balance.
- The balance transfer option is not valid on all transactions.
Additional reporting by Kelly Meehan Brown.