Playing the Credit Card Shuffle

If you have credit cards with balances and are only making the minimum payments, you should look into consolidating your debt. Otherwise, it will take you a very long time to pay off the balances and you will pay a lot of interest in the process. Look into taking advantage of any balance transfer offers you may receive in the mail, but be sure to look them over carefully. Here are a few things you should consider when performing balance transfers with credit cards:

1. Try to pay off highest interest balances first.
   This just makes logical sense. You are paying more interest each month and compounding at higher rates. Paying these off first will help improve your cash flow quicker.
2. Do not perform a balance transfer on a card that already has a balance.
   Say you have a card with a $3,000 balance at 24% interest and a total credit limit of $10,000. You receive a promotional offer in the mail for a 2.99% fixed for life and decide to put $7,000 more on the card at the promotional rate. Sure you may have a great rate for the $7,000 you’ve refinanced. However, when you make payments on the new balance, it is very likely that payments will go towards the lowest interest rate first. That means that you will still paying 24% interest on a $3,000 balance.

   That means in the first month, you will add $60 to the $3,000 balance. If that wasn’t bad enough, the interest is compounding each month and the additional amount added increases each month! $60 will be added in the first month (balance = $3,060), $61.2 will be added in the second month (balance = $3,121.2), $62.42 will be added in the third month (balance = $3,183.62), etc.

3. Open new credit cards sparingly.
   More than likely you don’t have a lot of $0 balance credit cards lying around for taking advantage of promotional balance transfers. You may need to use a balance transfer offer for a new credit card in order to get the ball rolling. If you do open a new credit card, see if you can get a credit limit for at least the balance on your highest interest card. If you can get a credit limit that will cover the balances on multiple cards, even better.

   Once you have paid off one ore more of your balances with the new card, don’t cancel your old credit cards!!!! Not only could this potentially bring down your credit score (see my article on building and rebuilding credit), but you can now take advantage of balance transfer offers on your old credit cards. If you contact your old credit card companies, it is very probable that they have balance transfer offers you can use.

   If you still have high-interest balances to pay off, use the balance transfer offers on your old cards that you paid down to a $0 balance. It is better to use balance transfers on your existing cards as much as possible without opening new credit cards (and without conflicting with rule #2). This will keep the number of inquiries on your credit report to a minimum, and will make it easier to keep track of your balances and rates.

4. Fixed rates vs. introductory rates
   Be very careful when using introductory rates. These typically have an introductory period (12 months, 18 months, etc.). You can expect to pay a very high rate once the introductory period expires. Use balance transfer offers with introductory periods only if you will have enough time to pay it in full before the introductory period expires. As a rule of thumb, it is probably better to use balance transfers with introductory periods for smaller balances. The payments to pay the balance in full before the period expires will be lower and more manageable. If you have very high balances, you might want to use fixed rate for life offers instead of those with introductory periods. Otherwise, you will need to play the credit card shuffle once more, before the introductory period expires.
5. Be aware of the transfer fees
   More often than not, balance transfer offers come with transfer fees. Typically, the fee is a percentage of the balance transfer amount with a minimum and maximum fee that will be charged. If the fee is very high, it may take some time before you actually begin to realize any savings by performing the balance transfer. You should be very careful when performing a balance transfer with a high fee and an introductory period. If the fee is too high and the introductory period is too short, it may be more expensive than just simply not refinancing and maintaining the balance on your old card.

If all of this sounds cumbersome (and it is), you can always take the easy way out and get a 36-month fixed rate loan with Prosper. Prosper is a lending community where people can lend money to other people. Rather than borrowing from a bank, you’re borrowing from multiple individuals that compete to fund your loan. This often results in a much lower interest rate than you might pay with a bank or credit card.

If you do decide to play the credit card shuffle, please check out my Credit Card Refinance Calculator. It’s a nice little tool I put together that can help you figure out whether or not it is worth taking advantage of a balance transfer offer. It performs a comparison between your current credit card and refinancing with a balance transfer offer.

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