Expenses

This category looks at stuff that we spend money on!

Balance Transfer Cards: The four rules of Balance Transfer Cards.

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Balance transfer cards can be a great tool for paying down debt if you choose carefully and know exactly what you’re getting. Many have 0% or very low interest rates, much less than conventional credit cards. And used properly these cards can help borrowers pay off their credit card debt much quicker…

Pay Off the Balance!

Most issuers will only extend these rates to borrowers with good credit. You can help pay down your debt with such cards as long as you change your spending habits! Pay off the balance; don’t add to it by racking up the debt on the cards that are now paid off. A balance transfer card should not be used like a regular credit card; many issuers will not extend the zero or low rates to new purchases using the card.

Read the Fine Print

Pay attention to the introductory rate, when it expires and what the interest rate will be at the end of that period. Is there a fee to transfer the balance from your high-interest card or an annual fee? Some transfer fees are as high as 4%, which would cost you $400 on a $10,000 balance. Some cards offer a zero or very low teaser rate but increase it to nearly as much as the card you’ve transferred from! The initial no or low interest rate usually lasts from six to twelve months. If you can pay down that debt as much as possible during that time, you’ll see significant savings when the higher interest kicks in.

Zero-Tolerance: Can you pay late?

Many balance transfer cards have a zero-tolerance policy. If you’re late with a payment or skip one altogether, the agreement between you and the issuer is void and much high rates kick in. If the issuer does allow late payments be sure to know the fees and any increased interest charges you might have to pay.

So Shop Around

Be sure to shop around for a balance transfer card the same way you would any other product. A 0% interest rate for 6 months then 9% after that will cost you more in the long run than a card that starts out then maintains an interest rate of 4-6% unless you pay the entire balance during the life of the introductory rate.

Balance transfer cards can be a real help in paying down debt as long you know exactly what you’re getting into. Remember, always read the fine print!

Keep tabs on your budget: send yourself notes, SMS, even email!

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In this regular feature, InvestorBlogger will publish stories and experiences that we all face everyday. This story is especially useful for those considering first time mortgages, especially those with extra frills (like credit cards, extra loans, 100%+ financing…),

When I bought my house, my mortgage company offered me a credit card that seemed like a very good deal. They would apply 1% of my purchases to my mortgage principal when that one percent reached $25. I accepted the card and I paid off the entire balance every month but found myself getting into a bit of trouble after about four months.

I paid off the balance each month and incurred no interest, but I was beginning to spend more. That end table was great and less than fifty dollars. A garden hose for next summer was on sale. I could replace my cheap microwave at 60% off and help pay down my mortgage.

One month the bill came in and I was glad I was sitting down. I’d gone from buying essentials to just buying and believe me, that was a very tough month to live through! Now I subtract charges from my checking balance, writing the amount in red. No more surprises when I treat the card as a debit card. I keep a better eye on expenses and don’t overspend. I’m still paying down my mortgage from my everyday purchases—just a little more sensibly.

Thanks

Shopper

InvestorBlogger writes:

However you pay when you out shopping, it’s always good advice to keep a track of the expenses that you incur. A little note in your notebook, an SMS, or a message on your answer machine/in your email-box… all of these are good reminders in case you threw away the credit card receipt. Of course, you shouldn’t throw them away, either. But this way you can double check your purchasing, and keep tabs on whether you are exceeding your budget or not.

More importantly, though, tying other financial products to your mortgage may not always be a good idea. Additional lines of credit, such as personal loans, 2nd home loans, credit cards, etc., may increase the loading of loans on you, increase the rates that you may for such loans, and may (as the writer found out) make repayments even more difficult on the primary mortgage, as well as other outstandings.

 

Should you pay off your balance or make a minimum payment?

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With a lot of people facing increased financing pressure, should you be paying off your balance vs. making minimum payments?

Ideally, credit card balances should be paid in full each month. Many consumers, for whatever reason, can’t always do this. If you have a financial crisis or come up short when your credit card bill comes due, you’ll most likely make the minimum payment and carry the balance through to the next month.

Consider this example: Let’s say you had to replace your water heater suddenly and had to charge the purchase to your card. At the end of the month, that $450 comes due but you can’t pay the full amount. By making the minimum payment (usually 2-10% of the balance) you may have a little more cash to spend but it will cost you. If your minimum payments are 3% of your balance you would pay $13.50 per month. That would free up a lot of cash, right?

Wrong. By making the minimum payment each month, it will take you nearly 4 years to pay off the debt and the credit card company will charge you (at an average of 14%) $165.46! It would be a little better to make a flat payment of $50 per month, extending the loan for ten months and only paying $28.26 in interest but you can see that carrying a balance on a credit card is very costly. This is why credit card issuers allow minimum payments—it’s very profitable for them!

Minimum payments can occasionally help in times of short-term financial straits but paying off your credit card balance every month is much more economical.

This calculator below should help you work out some scenarios.