Proceed with caution on balance-transfer ‘deals’

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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 balance.

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 real?

“If you’re a good, responsible consumer, it can be a great opportunity,” says Mark Oleson, director of Iowa State University’s Financial Counseling Clinic.

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 card.

“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 into it.

“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 locked in.

“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 won’t.”

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 to jump.

“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 “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,” Bilker explains.

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,” says Williams.

“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.