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When does a balance transfer make sense?

Do you have a financial question that's keeping you up at night? Ever wished you could get a second, or third, opinion on what to do with your money? Here's your chance: Bankrate.ca is introducing a new monthly feature whereby you submit a question, and we get three industry experts to weigh in. The topics are up to you -- you ask the questions, and we'll get the answers.

Here's this month's question: "Some credit card companies offer balance transfers at really low rates, much lower than a normal credit card or even a line of credit. If I'm carrying a balance on my credit card and line of credit, is transferring my balance a good way to reduce interest payments and get a handle on my debt?"

Beware of the fine print
While Laurie Stephenson, a Certified Financial Planner, or CFP, and principal at Stephenson Daigle, in Halifax, N.S., understands the appeal of such offers, she warns clients to watch out for hidden fees, which often appear in small print and take the form of a one-time charge or a percentage of the balance transferred.

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Depending on how much debt you have, transferring from an 8 per cent line of credit to a credit card with an introductory rate of 1.9 per cent could actually leave you no further ahead. "It's definitely buyer beware. As cliché as it sounds, if it looks too good to be true, it probably is."

Stephenson is concerned that when the introductory rate expires, people are still left in debt, not to mention with another credit card that they're in danger of maxing out. Too often, people get caught up in a cycle, flipping from one credit card to another or spreading debt out over a number of cards in an effort to take advantage of introductory rates.

"I've seen people with spreadsheets trying to keep track of it all and it's stressing them out," says Stephenson. She advises people to get a handle on debt through a manageable consolidation plan or, as is very common with low mortgage rates these days, by repositioning debt. "The reality is they need to suck it up and pay down their debt," says Stephenson.

She says those tempted by low-interest introductory rates have to be realistic. "Normally, it's about hooking in people who are poor money managers. If people are carrying debt and they're going to pay attention and juggle from card to card, fine, but those people are few and far between."

Be committed to debt elimination
Lee Stewart is one such person. While not a financial professional, he is an expert of sorts when it comes to using low, introductory rates to manage debt. About 18 months ago, the Toronto-area dad, who asked we change his name because he didn't want to embarrass his family, was carrying about $14,000 on his line of credit, often using it to cover unexpected expenses or big-ticket purchases (including a used car).

"I never carried a balance on my credit card, but I often used my line of credit to pay off my credit card," he says. While the 8.5 percent interest rate on his line of credit was far better than the 19 percent on his credit card, Stewart was increasingly uncomfortable watching the debt pile up.

(continued on next page)
-- Posted: May 8, 2009
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