Pitfalls of escaping high APRs with a balance transfer

Opening Credits columnist Eric Sandberg
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.

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Question for the CreditCards.com expert

Dear Opening Credits,
My husband and I both have less than perfect credit and want to transfer a balance on one of his cards into my name for one of those promotional deals. We are trying to avoid the high interest charges that are about to start on his. When I went to apply for one of the offers I received, I was told that it was not possible to transfer any balance to the card except those in my name. Do you have any suggestions about what we can do to avoid these interest charges? The card he has and this one offer are the only ones we can currently get with 0 percent APR on balance transfers unfortunately. -- Shanna 

Answer for the CreditCards.com expert

Dear Shanna,
When credit card interest rates are high, the cost to hang onto a debt becomes very expensive. I understand why you'd want to move balances to an account with a lower rate. It makes sound economic sense.

The problem is the offers aren't always available. A better (and guaranteed) way to avoid finance charges is to only charge the amount that you can and will pay in full before the grace period ends. That's the beauty of plastic. Use it right and you can enjoy free short-term loans as well as a whole host of other perks -- like rewards programs. Pay less than the total due, though, and the company will add finance fees to whatever you shove off until the next month. The power of compound interest will then work against you, since interest is charged on interest and not just on the amount you spent.

Just how bad the financial damage will be depends on the amount you roll over and the APR. The higher they are, the worse it will be. And if you really go off the deep end and your debt gets stuck at the credit limit or you skip one or more payments, you end up with what you and your husband have: bad credit and hiked up APRs.

So what can you do about it now? You're correct that one solution is to play the balance transfer game. It can work, but you've got to accept the credit card company's rules and restrictions. Here's how to make the most of it:

  1. Plan for the fee. Creditors typically charge 2 percent to 3 percent of the balance to conduct the transfer, and then add it to the amount you owe.
  2. Make sure the offer is good and long. If the rate will increase dramatically after just a few months, you're really only making a horizontal move.
  3. Pay on time. One late payment and the super low rate usually disappears.
  4. Delete the debt before the deal expires. Send enough every month so that you are able to pay down the balance within the teaser time frame.
  5. Suspend all charging until you're debt free. If your intention is to get ahead, you can't live behind anymore.

As for your husband's accounts, the two of you need to simultaneously concentrate on debt reduction and resuming a perfect payment schedule. Eventually, his FICO score will increase to a level that other creditors find attractive. At that point, he may qualify for a 0 percent balance transfer deal, but hold off until he explores what his original lenders will offer when is reputation has been healed. They may reduce the punitive APR to a more reasonable one with a phone call, thus saving him the transfer fee and having to open yet another new line of credit.

See related: When do credit card balance transfers make sense?, Weigh all costs before doing a balance transfer

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Updated: 12-11-2018