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Bankruptcy Articles

Tuesday, September 23rd, 2008

by Theodore Sliwinski, Esq.

Credit Card Balance Transfers: A Bankruptcy Substitute?

Balance transfers are often advertised with an offer of dramatically reduced intro rates for borrowers who are willing to transfer their balances to a new credit card. Obtaining  additional credit cards though is rarely the answer to manage or reduce your debt. In fact, obtaining additional credit card(s) usually only worsens your financial problems. Many people keep their existing credit card accounts open and then amass even greater debt. Balance transfers do not address the core issue for most debtors: they do not earn enough income to reduce their current debt. The bottom line is that credit card balance transfers only make your financial mess even worse. It is similar to trying to get out of quick sand. By obtaining new credit cards most debtors only sink deeper. Meanwhile, chapter 7 and chapter 13 bankruptcies are successful because they address the root cause of peoples’ financial problems by eliminating or reducing the total amount of debt.

The dangers inherent in balance transfers are usually found in the small print. Low introductory interest rates are used to get people to transfer their balances onto one credit card, and they often seem so appealing that the hidden costs and fees are hard to find or understand. The low interest rate usually lasts for only a limited amount of time. At the end of that period the introductory interest rate rises often to a much higher rate than that of the original credit card. The low introductory rate period is often canceled if the borrower makes any late payments on the account. The interest rates offered may only be applicable to balance transfers, and a different interest rate will then be applied to all cash advances and purchases. Usually, payments made will be applied to the lower balance first, leaving the balances with the higher interest rates continuing to rack up interest. It is also important to note that frequent balance transfers often damage a person’s credit score. The increased activity can make a person appear to be a credit risk, and having too many active accounts can be bad mark to a person’s credit score.

The costs involved with a balance transfer can quickly cancel out any financial gain from a low intro interest rate. The common fees include monthly finance fees, annual fees, balance transfer fees, cash advance fees, over‑the‑limit fees and convenience check fees. Many borrowers often end up paying more in fees than the amount they are saving with the lower interest rate. The lenders also frequently push expensive add‑ons and profit boosters, like credit protection insurance, which can cost as much as $45 a month. The fee is often charged up front, meaning the borrower is required to pay the interest each month on the extra amount. In summary, it is very important to think twice before you transfer balances from one credit card to another. It is important to examine all of your options and speak with your attorney before you make a financial decision that could have long‑term detrimental implications.