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You think you’re gaming the system: Whenever your credit card debt gets too high, and those interest payments start looking ominous, you transfer your debt to a new credit card, one that has an introductory interest rate of 0 percent for anywhere from six months to a year.
By doing this, you avoid paying interest on your debt. But are constant credit card balance transfers really an example of sound financial management? And can all these transfers damage your credit score?
Delaying the Inevitable?
Transferring your credit card balance to a new card with a low introductory interest rate can be a smart move if you plan on paying down your credit card debt. If you are merely transferring your balance to temporarily avoid paying interest, then it’s a bad move.[include file=/wp-content/themes/customtheme/rec-balance-transfer.php]
What often happens is that consumers who don’t change their negative spending habits — such as relying on their credit cards to make purchases that they can’t afford — simply continue to build their credit card debt even as they transfer their balances from card to card. Having a high amount of credit card debt will hurt your credit score. That, along with missing payments or making late payments, will cause your credit scores to fall steadily.
Lenders don’t like to pass out loans to consumers with high levels of credit card debt. These consumers, they feel, are walking a dangerous tightrope: Their debts can easily overwhelm them, and lead them to default on whatever new loans they take out.
Don’t let balance transfers fool you into thinking that you’re dealing with your credit card debt. They won’t fool lenders. And if your growing credit card debt leaves you with lower credit scores, you’ll be in for a tough financial time. It’s not easy to make it through today’s financial world with low credit scores: Lenders will be hesitant to lend you money, and you won’t be able to qualify for any but the highest-interest-rate credit cards.
You can also hurt yourself in other ways by constantly transferring your balances. Any new purchases that you make on a card might not come with that same 0 percent interest rate. In fact, they might come with interest rates that are 17 percent, 19 percent or higher.
And what if you don’t pay off your debt before your new card’s introductory rate ends? True, you can always try to transfer your balance again to another card. But credit card issuers are pickier these days, thanks to the lessons they learned during the Great Recession. What if no other credit card issuer is willing to take on your balance transfer? You might find yourself stuck with loads of credit card debt at high interest rates.
As always, the best way to deal with credit card debt is to pay it off as quickly as possible. If you do transfer your balance, set aside extra money each month to whack away at your revolving debt. And resist the urge to put more purchases on your card. You’ll never escape the high-interest-rate debt that comes with credit cards if you don’t learn to control your impulse to overspend.
Credit card balance transfers can make sense, but only if you use them in conjunction with making a serious effort to pay down your debt.