Cool Credit Card Rates Can Really Burn You
George Boelcke CCP
June 14, 2007
If there was a 75% chance you’d win something in the next lottery – would you buy a ticket? Of course! How about in sales? If there’s a guarantee that three of the next four clients will buy something really profitable from you – would you do whatever it takes to get to talk to four clients? Of course – stupid questions, right?
Well, that’s exactly why credit card companies mail out more than six billion card solicitations every year, and some of them will come with some pretty cool rate. I just got one last week with a 1.9% rate offer. Yes, a lower rate can translate into real savings, but for a limited time. However, you really need to stop, think it through and read the fine print, because nothing is every free, and few things are what they appear to be.
First – these offers are for a short time. Maybe six months or up to a year, tops. The shorter the rate offer, the less value there is to you in going through the hassle of applying, getting the balance transfer processed and the possible affect on your FICO score by adding another card to your collection.
Second – the card issuer wants you to load up the balance right to the maximum – and almost everyone does. After all, 1.9% is a great deal and will save you a bunch of interest, so why wouldn’t most people? But that same mindset also makes it very unlikely that we’re motivated to pay much on the balance – we think of it as free credit - for a while.
So at the end of the promotional period, the standard 16 to 20 percent rate kicks in, and they’ve got us right where they want us – with a huge balance and no hope of paying it off quickly.
Third – the majority of card issuers will now charge you a hefty transaction fee for these balance transfers to the cool rate account. It can range up to four percent and something you have to find and know in all that fine print!
Fourth – these cool rates NEVER apply to cash advances and often don’t apply to new charges of any kind. That makes it imperative to read the fine print of whether this cool rate applies to transfers only or also to any new charges during the promotional period. If not, the minute you charge anything on this new card, interest for those charges will keep accumulating, while every dime you pay only goes to pay down the cool rate balance.
You need to read that again if the rate break only applies to balance transfers: On a $5,000 transfer, the card issuer will give you the cool rate. Then you run up $2,000 in new charges. No matter what you pay, the statement says that all the money you pay goes only onto the cool rate balance. Nothing is applied to the new purchases. So at that point, you’re already in a situation where your potential interest savings are significantly reduced, when part of your balance is running up interest at the full rate.
News flash: Card issuers aren’t giving away free money – are you kidding me? They’re playing the odds, even better than a casino, that they’ll win big time. But their definition of a big win is the opposite of yours. It’s that you’ll have a huge balance when the ride is over, won’t be able to pay it off in full when the regular rates click in, and that you’ll charge a lot of new purchases along the way.
It’s a game they’ll win three-quarters of the time. A recent UK study showed that less than a quarter of all people taking advantage of these cool rate offers pay it off during the promotional period. That’s exactly the odds card issuers count on. But if it were up to me, I’d rather have you owe $2,000 on a high interest card where you’re really mad and focused on paying it off – no matter what it takes. The alternative is a much higher balance on a temporary low rate card where we tend to have little interest in paying it off and generally always owe way more than when we started down this slippery slope.
Well, that’s exactly why credit card companies mail out more than six billion card solicitations every year, and some of them will come with some pretty cool rate. I just got one last week with a 1.9% rate offer. Yes, a lower rate can translate into real savings, but for a limited time. However, you really need to stop, think it through and read the fine print, because nothing is every free, and few things are what they appear to be.
First – these offers are for a short time. Maybe six months or up to a year, tops. The shorter the rate offer, the less value there is to you in going through the hassle of applying, getting the balance transfer processed and the possible affect on your FICO score by adding another card to your collection.
Second – the card issuer wants you to load up the balance right to the maximum – and almost everyone does. After all, 1.9% is a great deal and will save you a bunch of interest, so why wouldn’t most people? But that same mindset also makes it very unlikely that we’re motivated to pay much on the balance – we think of it as free credit - for a while.
So at the end of the promotional period, the standard 16 to 20 percent rate kicks in, and they’ve got us right where they want us – with a huge balance and no hope of paying it off quickly.
Third – the majority of card issuers will now charge you a hefty transaction fee for these balance transfers to the cool rate account. It can range up to four percent and something you have to find and know in all that fine print!
Fourth – these cool rates NEVER apply to cash advances and often don’t apply to new charges of any kind. That makes it imperative to read the fine print of whether this cool rate applies to transfers only or also to any new charges during the promotional period. If not, the minute you charge anything on this new card, interest for those charges will keep accumulating, while every dime you pay only goes to pay down the cool rate balance.
You need to read that again if the rate break only applies to balance transfers: On a $5,000 transfer, the card issuer will give you the cool rate. Then you run up $2,000 in new charges. No matter what you pay, the statement says that all the money you pay goes only onto the cool rate balance. Nothing is applied to the new purchases. So at that point, you’re already in a situation where your potential interest savings are significantly reduced, when part of your balance is running up interest at the full rate.
News flash: Card issuers aren’t giving away free money – are you kidding me? They’re playing the odds, even better than a casino, that they’ll win big time. But their definition of a big win is the opposite of yours. It’s that you’ll have a huge balance when the ride is over, won’t be able to pay it off in full when the regular rates click in, and that you’ll charge a lot of new purchases along the way.
It’s a game they’ll win three-quarters of the time. A recent UK study showed that less than a quarter of all people taking advantage of these cool rate offers pay it off during the promotional period. That’s exactly the odds card issuers count on. But if it were up to me, I’d rather have you owe $2,000 on a high interest card where you’re really mad and focused on paying it off – no matter what it takes. The alternative is a much higher balance on a temporary low rate card where we tend to have little interest in paying it off and generally always owe way more than when we started down this slippery slope.
Print
Email
