Balance Transfers

When do credit card balance transfers make sense?


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The Credit Guy, Todd Ossenfort

The Credit Guy, Todd Ossenfort, is a credit expert and answers readers’ questions about credit, counseling and debt issues.

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Question for the expert

Dear Credit Guy,
If I do a balance transfer, will the card that I do the transfer from be closed or will it still be useable?
Dean Deal

Question for the expert

Dear Dean,
The short answer to your question is yes, as long as the account is in good standing, the card from which you transfer the balance will still be useable once you have paid the balance with credit from another card. If you’re thinking of closing that account, do so carefully, especially if it’s one of your oldest cards, and one that has a long history of on-time payments. Canceling that card would cause damage to your credit score.

There. That’s the short answer. But, because I have the time and the space — and because I believe you and others will benefit — I’m going to give you the long answer as well.

What I would like you to consider is the reason for the credit card balance transfer. Ask yourself, “Why?” Many circumstances exist where it would make sense to transfer a balance from one credit card to another. However, there are other circumstances where I would be suspicious, and maybe even consider it a very bad idea to move balances.

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Let’s compare two scenarios.

Scenario No. 1: Imagine someone with a $3,000 balance on one credit card with an interest rate of 12 percent who is committed to paying down the debt with a plan, including exactly how much and how long to pay off the balance. Under that circumstance, transferring the $3,000 to a 0 percent interest or teaser rate card would make sense. This person would greatly benefit from paying less in interest charges and could pay off the balance faster.

The biggest reason this scenario makes sense is because the person has a workable plan for paying down the debt. Barring some financial emergency, he or she is likely to pay off the balances before the low rate expires and will have saved a significant amount in finance charges.

Scenario No. 2: On the other side of the balance transfer game is someone who owes the same $3,000 and wants to transfer the balance because he or she wants to buy a big-screen TV to watch the Super Bowl, or worse yet, can no longer afford to make the minimum payment  and needs the lower interest rate just to keep the account current. In addition, our big-screen TV buyer has no plan as to how the debt will be paid off, or even worse, doesn’t care.

In the latter example, because no definite plan has been identified for paying the balance, a late or missed payment could happen easily and often does.  If this happens, the low interest rate will be increased — most likely close to 30 percent — and the person will be no better off than before the transfer, if not worse. The bad news doesn’t end there. Many people who transfer balances or pay off debt with a home equity loan with no plan for repayment begin using the credit card with the 0 balance again and end up with another large balance. That is what I’d call an extremely bad idea.

Unfortunately, this scenario has become quite common over the past three or four years with low interest rates for refinancing a home. Many people who chose to go down this road are now sitting with maxed-out credit cards and no equity left in their homes. OUCH!

So, Dean, if your reason for transferring is similar to scenario No.1 , you have a good plan for paying off the balance that is transferred and most importantly, you are not planning to continue charging on the card you want to be useable after the transfer, then I say go for it!

If, however, your reason is more like scenario No. 2, I would strongly recommend you come up with a workable plan to pay off the debt without transferring the balance.

Take care of your credit!

Todd Ossenfort is the chief operating officer for Pioneer Credit Counseling in Rapid City, S.D. Pioneer Credit Counseling has been a member of the Association of Independent Consumer Credit Counseling Agencies since 1997.

The Credit Guy answers a question about a debt or credit issue from a reader each week.
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