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Information on mortgages, home equity loans, and consumer credit to help you use the power of financing to your advantage.
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Credit Cards > Lowest Interest
Beware of tempting offers to borrow more on low-rate credit card
SKIP WOLLENBERG, AP Business Writer. Associated Press.
Copyright Associated Press
Q: A few years ago, I got a low interest rate on balances transferred to a new credit card, and have been steadily reducing the debt. I've never used the card for additional purchases. The card issuer recently offered me checks to borrow more at a rate of 1.9 percent for six months and a higher variable rate thereafter. Should I bite?
A: The problem with putting more debt on the same card is that you cannot specify which debt is being paid off first. If you still owe a lot on the original loan, you could wind up being stuck for months if not years with higher-rate debt on the checks you write.
Let's presume you initially borrowed your limit of $5,000 by transferring balances on higher-interest cards to the new one which offered a fixed rate of 10 percent.
By making modest monthly payments, let's say you have reduced your balance to $3,000. The checks would enable you to borrow up to another $2,000 for 1.9 percent for the first six months and a variable rate after that would now be about 15 percent.
Robert Manning, a professor of economic sociology at Georgetown University who has studied the credit card business, said some people write notes with their payments saying they want it applied to "their 19 percent debt" rather than lower-rate debt.
But he said the lenders don't comply with those instructions because it isn't what their contract with the card holder says.
Some cards require that the older debt be retired before additional, newer debt at a different rate can be repaid. Other card issuers specify that payments go toward reducing the lower-rate debt first.
In either case, he said borrowers who are making modest monthly payments are unlikely to pay the entire card balance off in the six months for which the low rate for the new debt applies. And that means that the card holder will end up having to repay a large portion of the new debt at the higher variable rate.
Manning said it would be better for a borrower to wait for an opportunity to get a new card at a low introductory rate and start fresh.
Consumers also should stay alert to hidden extras or proposed changes in their existing credit card contracts, he advises.
Is the card company planning to charge a fee for each check you write? Is it redefining when a charge begins accumulating interest or how it determines the balance against which interest charges are calculated? Is it changing the penalty for a late payment or when a payment is considered to be late?
"It is extraordinarly complicated," Manning said. "You've got to read your contract."
On the Net: Robert Manning site: http://www.creditcardnation.com
For use anytime
Reproduced with permission of the copyright owner. Further reproduction or distribution is prohibited without permission.
People: Manning, Robert
Dateline: Undated
Text Word Count 461
The tips on this website should be considered food for thought only. Lendingtips.com is a clearinghouse of ideas, not a professional adviser. Before any important decision, please consult the appropriate professionals (lawyer, accountant, real estate agency, broker etc.).
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• Credit Cards > Lowest Interest Credit Card Articles Archive
• Credit card payoff Use this calculator to see what it will take to payoff your credit card balance, and what you can change to meet your repayment goals.
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