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Debt Management Guide 2008
Danger ahead
Debt problems don't just suddenly appear. If you're alert for signs of trouble, you can probably avoid them.
Danger ahead
Step slowly onto the balance-transfer wagon

When you're trying to pay down debt, a balance transfer to a credit card with a lower interest rate may seem like a good idea. After all, the lower rate will save you interest fees, right? Not necessarily, according to a number of financial experts who say the money transfer game should only be played if all of the rules are understood.

"We tend to recommend against balance transfers because basically what you've got is a situation where you're not really making any progress," says Nick Jacobs, spokesman for the National Foundation for Credit Counseling. "All you're doing is perpetuating your debt because you're moving your debt from one card to another. All you're really doing is trying to stay ahead. It's a tough proposition."

The process works like this. Say you have $10,000 in debt on a card that is charging you 18.9 percent interest. You get a credit card solicitation in the mail offering you 3.9 percent if you transfer your current debt load to the new card. At first glance this sounds like a terrific deal since your new interest rate will be 15 percentage points lower.

But balance transfer offers tend to be temporary, as credit card companies seek to entice new customers with low rates only to raise them a few months later. In many cases, once the promotional period is over, a consumer is stuck with an interest rate that's higher than the initial rate with which he or she started.

Another factor to keep in mind is the effect balance transfers will have on your credit score. If you're constantly opening new lines of credit so you can transfer your debt, you may be doing more damage than good because multiple credit inquiries and the opening of new lines of credit cause your score to drop.

Creditors will also be able to see your pattern of transferring balances and that might affect a lender's decision to extend credit at a later date, says Jennifer 'J.B.' Bryan, president of J. B. Bryan Financial Group, based in Washington, D.C.

"If you keep switching, it will be on your credit report and that may stop you from being attractive to creditors," Bryan says.

Making balance transfers work
That's not to say that transferring debt to a lower-interest credit card is always a bad proposition. "If you do switch, you have to have a full strategy in which you're going to pay it off during the promotional period," says Bryan.

Say you plan to pay off your debt in six months, and a credit card offer comes your way that promises a significantly lower interest rate for the next six months. That offer might be a good one since it can expedite your payoff plan and save you money down the road.

However, you've got to be committed to paying down the debt. The lower interest rate will likely lead to a lower minimum payment. If you spend the extra money rather than funnel your funds to paying off the debt, you might find yourself back in debt trouble or still making payments six months later when the promotional period ends.

-- Updated: June 16, 2008
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