Credit Card Debt Management

Balance transfers have their place, given the right circumstances. But balance transfers are not some mystical, magical solution to all money woes. A person still has the same amount of debt after the transfer as they did before. Money Safe blog just fielded an interesting question along these lines.

I’m trying to pay off two other credit cards and I want to … be paying off just ONE. Is that possible??? …Currently I am unemployed. I’m late on paying one of the cards. Is there anything I can do?

In this scenario, it appears that a balance transfer would be a temporary fix for the root problem - negative debt to income ratio. It is possible that the monthly payments might be slightly lower for six to 18 months after a balance transfer, during the no-interest period that is so common with such offers. However, the interest will come around again and may even climb higher than the interest rate on the two old credit cards.

Balance transfer options are tempting, particularly if you’re serious about getting out of debt and hate seeing interest charges eating up so much of your monthly payment. But until the new balance transfer card gets some age on it, your credit report will take a small hit for opening a new credit card account.

Presumably, a person would close old credit card accounts after the balance transfer to avoid using them anymore (although people don’t always do that, and instead dig themselves deeper into debt). However, by combining all your debt onto one card, you also run the risk of inching too close to your credit limit. For instance, it’s easier on your credit score to have $2,500 on each of two separate credit cards that each have a $5,000 limit rather than the entire debt of $5,000 on one credit card with a $5,000 limit and an interest-free period.

So in some cases, balance transfers aren’t all their cracked up to be. Whether it’s the right choice for you depends on your credit score, financial situation and self-discipline. If you can get approved for a balance transfer credit card, are in a financial situation to attack the debt hard during the interest-free period and have the self-discipline to do so, go for it. For those who are simply coasting along, planning to continue using their credit cards and may be unemployed as in the case above, all they’re buying is time. The interest charges will return and they’ll come back with a vengeance.

Attack the root problem first before looking at balance transfers. How will you pay down the debt? Should you get a second part-time job? Should you look for a higher-paying job or just ask for a raise? Do you need to get more education? Are you spending too much on dining out? For my family of three, dining out was a shocking $600 monthly expense at one point. Wow, that could pay off a lot of debt! Wise spending, better income and greater self-control, coupled with financial tricks like balance transfers, will treat the disease instead of just the symptom.

You bank online, you play games online, you check the weather, the news and sports scores online, some people even work and date online. It makes sense to shop for credit card offers online as well. Just make sure you are using a reputable web site that offers details on the credit card offers along with a side-by-side offer comparison. Banks.com has compiled pretty comprehensive lists of credit card offers under categories like “Business credit cards” and “bad credit credit cards.” Simple to use, easy to read.

If you are eyeing new credit card offers - particularly for the purposes of balance transfers - you will want to read the latest from The Motley Fool. Essentially, a strategy used in 99 percent of credit card offers is to apply monthly payments in a tiered system to pay off lowest-interest debt first. For instance that $140 payment will go first toward interest charges and then toward paying off balance transfer amounts. This holds true even if the card has been used for purchases or cash advances, transactions that carry much larger interest rates. It is a tiered system of repayment. Almost as dirty as the Universal Default Policy so many credit card companies love. The Motley Fool scoured 300 credit card offers and found the four - that’s right, four - that don’t use this system.

Last but not least, the Baltimore Sun is taking notice of the lenders’ new habit of replacing mortgage offers with new and improved, more lenient credit card offers. A recent post in My Two Dollars points out that lenders “have eased their lending standards to be able to grab a bigger share of the credit card market, which the article says is ‘banker-ese for making lots of loans that won’t get paid back.’”

And the lenders will write-off the no-pay customers and in turn be forced to raise interest rates for good-credit customers and find more ways to slip in these mystical, magical fees. I guess they just feel like playing Robin Hood.

So we have discussed the pros and cons of giving teens credit. Soon we will discuss the joys and potential pitfalls of business owners relying on credit. For now, here is a list of credit cards for business owners.

This list includes my personal favorite, the Advanta Platinum MasterCard. This power-packed card, recommended by SmartMoney magazine, offers 0% APR for 16 months and 7.99% fixed APR thereafter on balance transfers, 7.99% variable APR on purchases, $0 fraud liability, your choice of 5% cash back or travel rewards and no limit on rewards earned.
Business credit cards are truly better than consumer cards in so many areas, so take advantage of them if at all possible.

Also in the meantime, here’s something to cheer about.