Bloomberg News
WITH holiday bills buying come due, it may be a good time to consider a credit card balance transfer. By taking advantage of introductory-rate card offers, debt-strapped consumers can slash double-digit interest rates to as low as 5.9 percent for as long as nine months. By transferring balances again, or by negotiating an extension of the "teaser" rate, consumers can keep rates low indefinitely.
"A balance transfer is a wise, strategic move that enables you to reduce debt," said Robert K. Heady, founding publisher of Bank Rate Monitor in West Palm Beach, Fla., which tracks bank and interest rates.
Introductory card rates are so attractive that some entrepreneurs are turning to credit cards and away from more traditional means of financing their businesses.
Three years ago, Scott Kennedy, president and owner of Axcelis Inc., a Seattle-based artificial intelligence software company, used low, credit card introductory rates to cover part of the start-up costs for a new product. Instead of borrowing from a bank at higher rates or turning to an investor, who might demand a controlling interest and a share of the profits, Kennedy charged $30,000 on plastic.
Kennedy later transferred all the debt to a small number of cards at opening rates of about 5.6 percent. Then, before the low-rate periods ended, he moved the balances to other cards. Each time he got a better offer, he moved the balance again, making sure never to miss a payment, until the debt was paid.
Of course, even the introductory rates of credit cards won't be as attractive for many consumers as some home-equity loans, which have the advantage of tax-deductible interest payments. The national average for a 10-year fixed home equity loan is at 9.5 percent, according to BanxQuote Inc., a New York financial information company.
Consumers, though, need to be homeowners to get these loans in the first place, and then must have an adequate amount of equity in their homes. So for many borrowers, credit cards remain the best alternative.
Consumers are facing a growing pile of debt and are looking for the fastest and least expensive way to pay it off.
U.S. consumers had a total of $1.23 trillion in outstanding debt in November, the last month for which figures are available, up from $781 billion five years earlier, according to the Treasury Department. That was close to October's record high. The figures don't include home mortgages.
Last year, the average credit report showed consumers had about 12 credit accounts, up from about nine in 1992, according to Orange, Calif.-based Experian, one of the three consumer credit reporting companies in the United States.
The percentage of those accounts on bank-issued credit cards, such as Visa and Mastercard, rose to 33 percent from 28 percent, while retailer charge cards, such as those from department stores and gasoline stations, halved from 34 percent to 17 percent in the period.
Competition among lenders is fierce, making credit card companies increasingly willing to offer lower initial rates and for longer periods of time, along with other perks to entice customers. Some let borrowers transfer a balance to "upgrade" to a gold or platinum card.
"The concern in the industry is that there's an ever-growing cadre of clever consumers who feel they always have an option to switch again," said Corey Stone, managing director of Stamford, Conn.-based Easton Consultants, which advises banks on electronic commerce. "Balance transfers have been used with an upgrade strategy. Others offer loyalty rewards that discourage turnover."
In recent years, banks have teamed up with corporations to offer credit card users discounts on airline travel, automobile purchases, cruises and other products. The prospect of a 5 percent discount on the purchase of a General Motors vehicle lured Stuart Blum, a certified public accountant from Parkland, Fla., to charge about $20,000 on one such "co-branded" card four years ago.
Since then, Blum has transferred the debt from lender to lender, even though he's saved up enough to pay it off. Instead, he invested the cash in a mutual fund that's earned, on average, a handsome 25 percent a year.
"Sure, you could use the $20,000 on other things, and you could get yourself into overwhelming debt," he said. "But you can also use the system to your advantage."
Of course, borrowing from Peter to pay Paul isn't without its risks.
Kennedy, the Seattle software entrepreneur, fretted that having multiple open lines of credit might make it harder for him to qualify for loans in the future.
"I was concerned initially that I might have some scars on my credit record," he said. So, when he needed to move into new office space, rather than borrow from a bank, he worked out a financing plan directly with the owner.
Still, playing the balance transfer game doesn't have to mean a tarnished credit history.
Financial planners and consumer advocates recommend finding out terms of the transfer -- for example, whether there are any fees attached and exactly how long the teaser rate will last.
"You really have to read the fine print," said Eileen Dorsey, a financial planner in St. Louis.
Anyone who has transferred a balance should cancel old accounts, lest they be viewed as a credit risk. Even if every card is paid off, a person with five cards, each with a credit limit of say, $7,000, has potential debt of $35,000.
How to cancel
When canceling a credit card account, Bank Rate Monitor recommends notifying the card issuer in writing, then instructing them to inform credit bureaus.A copy of a person's credit report also can be obtained, typically for $8.00, by contacting a credit reporting company. Here's toll-free numbers for the three U.S. credit reporting companies: Equifax Credit Information Services: 1-800-685-1111 Experian: 1-888-397-3742 Trans Union: 1-800-888-4213.
