Proceed with caution on balance-transfer
If you have excellent credit, you may see an enticing offer from Capital One in
your mailbox -- a 4.99 percent "life-of-the-balance" credit card deal.
And Providian is peddling 3.99 percent. Others offer even lower
rates. Sometimes, the card offer will even say 0 percent for the life of the
These offers usually come with a sales letter screaming: "Transfer
a balance for the last time!"
Well, low interest for life may sound terrific, but is it for
"If you're a good, responsible consumer, it can be a great
opportunity," says Mark Oleson, director of Iowa State University's Financial
But you have to be very careful. The first step is figuring out
what you need to do to keep that rate.
Clarify the deal
Sometimes you need to buy more stuff to lock in that rate. "Often, a company
will require something else" in order to get that permanent low rate, Oleson
explains. "I've seen an offer from Discover which provides 0 percent for
the life of the transfer, but you have to make two purchases per billing cycle.
"So when I make a purchase, it's 9.9 percent, or whatever
the purchase rate may be," Oleson explains. "But my payment goes to
the transfer rate first."
There is a way around this problem.
"I talked to Discover, and asked if there's a minimum requirement
for the purchase each month, and there isn't," Oleson says. "So theoretically,
I could go to the grocery store and charge 50 cents twice a month on my credit
"Basically, if I can get a good long-term transfer rate,
I want to make sure I'm not making purchases with this card -- unless I'm required
to," Oleson says. "And if I am, I want to make them small."
Be suspicious of the letter
Don't celebrate right away. Just because the letter says you have a $30,000
credit line at 3.99 percent doesn't mean you do.
Dr. Phyllis Mansfield, a professor at Penn State-Erie's business
school who studies credit card companies' letters to college students, says
card-issuer letters don't always deliver what they promise.
"It will say pre-approved, but it doesn't necessarily mean
you are," Mansfield explains. "They're just trying to get you to apply.
"I would wonder if this is an ethical offer, or if this is
a come-on," Mansfield says. "People may be pre-approved, but then
they will get a higher interest rate or a lower balance."
A rate of 3.99 percent "is just very low, and it may not
be a bona fide offer," Mansfield cautions.
Watch your steps
Even if the deal is for real, be very careful.
"What I've learned to do with credit card offers is read
almost like a third grader," says Cate Williams, president of Consumer
Credit Counseling Service of Greater Chicago, and vice president of financial
literacy for Money Management International. "Don't try to read too much
"The offer I recently got from a large bank said that if
you move over to us, you'll get all the bells and whistles, but it did say it
would give me a fixed rate on just the amount I move over from some other nasty
evil card that I have," Williams says. "So it's just that $1,000 that's
"The average consumer would speed-read that and think that
I can have that for purchases as well," she says.
Williams says it's important to think in a bigger way. "You
know the credit card company can't continue to lend you money at a loss. When
interest rates go up, and that $1,000 transfer is paid off, the interest rate
is going to change."
That's why Oleson of Iowa State says you should make sure the
permanent rate really is permanent.
"Make sure it is a fixed rate. A variable rate will look
pretty nice right now because of low interest rates, but in three years it probably
Oleson says that in his clinic, he has not yet seen life-of-the-balance
rates raised. Late payments, though, always change everything.
Be punctual -- or else
Even if you do get an offer, remember the essentials -- pay your bills on time.
"If you miss a payment, and missing a payment can be only
a day, that can send you to the credit penalty box," Williams says. "They
can accelerate you to the worst interest rate."
Most credit cards now have clauses that say if you are late on
any other credit card, they can jack up your rate. But some credit-card watchers
are now seeing that even late payments on utility bills can cause card rates
"It can be 2.9 percent for eternity, but it can jump to 29
percent if you're late paying your electric bill," says Scott Bilker, the
author of "Talk Your Way Out of Credit Card Debt" and founder of DebtSmart.com.
"A friend of mine was raised to 29.9 percent after he moved and an electric
bill was paid late.
"The greatest sin in debt repayment is being late,"
How to get such offers
You'll probably need a good credit score to get those permanent-rate deals.
"Many times, the low-interest rate offers are for their best
customers," Williams explains. "So a person who's had some poor payment
history or who has been a card jumper, well, in that case the company will say,
this guy is not going to stay with us."
People with heavy debt and a history of moving that debt from
one card to the other -- the very people who would most benefit from a "forever"
deal -- may not get them.
But that doesn't mean you can't ask for such a deal.
Scott Bilker says having lots of credit cards is a great way to
get offers since better offers usually come from existing creditors. Of course,
having many cards can create other problems, such as identity theft and the
temptation to spend, but for getting transfer deals, they're helpful.
"My wife and I have 80 cards," Bilker says. "I
get tons of offers from existing cards, and I also get new credit offers. The
better ones are always the existing ones -- they're the zeros, the fixed forevers."
Ask for a great perma-deal
Both Oleson and Bilker suggest that this strategy can work: Call your existing
creditor and say that you have a 4.99 percent offer from someone else and would
like something better from them. Even if you don't have an offer, ask.
Card companies are dangling interest rates for two reasons --
to get new business and to keep what they have.
"People feel they're at the mercy of the cards, and that's
just not true," Bilker says. "It costs about $200 in marketing dollars
to get a good customer. They pay a lot of money to find someone profitable,
and they don't want to lose you.
"Even if you pay your entire balance off every month,"
Bilker explains, "they're still making money from the merchants because
you're charging, and the merchants are paying the card issuers a percentage."
So consumers have bargaining power, Bilker insists.
Profit off the deal?
Bilker actually made money off his cards. He took $62,000
in transfer deals -- at 0 percent -- and then put the money in a money market
account at ING Direct. He pocketed $1,800 in interest after the transfer fees
were taken into account. That was two years ago, but he's still seeing plenty
of long-term low-rate deals.
Bilker says he "absolutely" would take advantage of
a low-rate, for-eternity deal.
He thought of doing this with his mortgage. But Bilker emphasizes
that you need to be extremely careful to try this because one slip -- one late
phone bill -- and you could be at 29 percent. Nothing could be worse for a huge
loan like a mortgage.
"I was trying to, for fun, pay off my entire mortgage with
these deals. But I didn't, because with refinancing at 4.75 percent, it wasn't
worth it. My best deal was 1.99 percent, and it wasn't enough -- it was $10,000.
"However, if I had a 9 percent mortgage and for some reason
could not refinance, I'd consider using a credit-card deal," Bilker says.
More mundane benefits
The bottom line is that if you're careful and pay everything on time, you can
benefit from locked-in low rates.
"I can currently get a used-car loan for 7 percent to 8 percent,
or I can get a credit card at 4.9 percent, or even lower on transfers, which
is an unsecured loan instead of a secured loan, and therefore better, at a great
rate," Oleson explains.
And for consumers who are trying to dig out of a pile of debt,
permanently low interest rates can be a huge help. The key, though, is to use
the savings toward debt repayment, and once the debt's gone, to save and invest
the money once earmarked for credit cards.
"Most people are not taking that extra $100 they saved on
credit card debt and investing it. They're spending it," Oleson says.
It's still debt
Some credit counselors worry that "permanent" low rates can send people
into the biggest trap: to forget that all debt is debt.
"Consumers find a variety of ways of tapping into cash at
all kinds of interest rates, but at the end of the day it's still debt,"
"But if you can break the debt cycle, you can move from spender
to budgeter to saver to investor."
The problem with low-rate deals, financial counselors say, is
that they are deceptively relaxing.
"If I pay 21 percent to Sears, I can easily feel depressed,"
Oleson says. "But with a low rate, I am lulled into a false sense of security.
I can be lulled to sleep.
"The challenge I see from the counseling side is, how did
you get into this debt situation in the first place?"
And if you don't answer that tough question, and make serious
inroads into your debt, an "eternity" rate combined with tiny minimum
payments can literally leave you eternally in debt.
But if you handle it right, credit watchdogs say, a "life-of-the-balance"
transfer deal can shorten the lifespan of your debt load -- and make your financial
life a little easier.
-- Posted: April 6, 2004