A Bargain or a Financial Trap?
If you have a credit card you undoubtedly receive offers from your bank for a credit card advance or credit card transfer (often represented as a credit card balance transfer).
Advance or Transfer Confusion
“How much is it?” A simple question but one that seldom gets a straight answer in the real money world.
In order to cope well in this strange financial world, however, it is essential to learn how to “count beans”, as the old expression goes.
While working at getting rid of your credit card obligations, for example, you may get a lot of tempting offers to transfer your balances to a reduced rate. Sometimes it makes sense but often it doesn’t.
Advance or Transfer Clarification
Reading the fine print is important. Understanding what it means is even more so.
For example, I received an offer from a bank to transfer balances to a low 1.9% until early the next year. It appeared to be a tempting opportunity for someone with a credit card balance to reduce their rate.
Understand the Credit Card Interest Rate
But look at the details. By the time the transfer clears and figuring the actual date this money would have to be paid before the rate being raised, I would be lucky to get six months use of the money.
Paying back this advance in equal payments would reduce the effective period to three months. That is because you will have less and less of the money as you make payments.
This is one of the misleading aspects of many of these offers for credit card advances and credit card transfers. They are often effectively for a much shorter period of time than people think and then higher rates kick in.
NOTE:
If you do an online transfer of some kind you will fare better. When mailed in the lending institution often delays the time before you actually get the money.
Your time before the higher rate clicks in will count from the time they get your request, not from the time you get the money.
The actual interest rate for the advance at times may not be bad if you do not consider that paying interest of any kind is bad. I prefer to earn interest not pay it, but that is another story. The problem is that the advance fee is often prohibitive even though it sounds smaller than it actually is, as you will see.
Understand the Transfer or Cash Advance Fee
Reading further I see that there is a 5% transfer charge. Since the maximum period to actually use the money is only six months that becomes 10%. And if paid back in equal payments over the six months, 20%!
This is where a lot of people fail to analyze the offer correctly. You have to think about how long you actually have the money and the rate. The transfer or advance fee can actually be quite significant.
As you see, in this case you would pay 5% but it is for only six months which is effectively three months on the average balance making the 5% into 20%. And this is before adding in the stated interest rate!
Conclusion: this offer of 1.9% is actually a minimum of 11.9% and paid in equal payments, 21.9%! This would not be a bargain.
Credit Advance and Transfer Choices
To be successful with money a person must learn to think differently than most people do. The fact is, most people don’t really understand money at all. They never think about where their money goes.
If you waste a lot of money on ATM fees, if you pay money for bank services you never even dream of using, if you pay exorbitant annual fees for prestige credit cards (who are you really impressing?), or if you waste a lot of money on other needless charges, don’t be surprised if your bank account has a smaller balance than you want.
Start reading the fine print, but from a new perspective. Ask youself about the total long term consequences of taking any financial action.
When it comes to credit card advances or credit card transfers, if there is no transfer fee and a lower interest rate than you currently have, a credit card advance or transfer could be worthwhile. But if there is an advance or transfer fee you would have to do some careful planning and calculating to know.
Use a calculator regularly to see how much you are being asked to pay after all the charges are included. And start congratulating yourself when you avoid costly mistakes others make daily without any awareness of their losses.
Are Card Advances and Transfers OK?
As you can see, Credit Card Advances and Credit Card Transfers (including Credit Card Balance Transfers) may have a place, but should be used cautiously and sparingly at most.
