Wednesday, August 20, 2008

Make low-interest-rate cards work for you

You can look at credit cards in all sorts of ways but typically they all fall into two major categories;

  1. Interest free period and high interest charge cards
  2. No interest free period and lower interest charge cards

If your current finacial situation doesn’t allow you to pay off your credit card in full each month, and you’re using the first type of card, then you need to look closely at swtiching. This is particularly important if you think your current financial downturn might be protracted. Why pay a higher interest rate on credit that is revolving each month when you could be paying a much lower rate?

There are a number of low-rate cards are on the market which have interest rates up to 9 per cent lower than the higher rate cards currently charging 18 to 20 per cent.

Balance transfers

A number of providers also offer even lower rates for the first six months or so on balances you transfer from another card. Like credit cards, balance transfers can also be placed into 2 important categories.

  1. Reduced “introductory rates” for a set period (say 6 months) then interest charges revert to the standard credit charge that appies to that particular card
  2. Reduced rates for the life of the balance transfer.

If you do decide to take advantage of the second type of card, offering a reduced rate for life of balance of transfer, you should consider not using this type of card for additional purchases until the debt you transferred is fully paid out. The cards offering this type of payment arrangement usually don’t have lower rates. Typically you will find that while the interest you pay on the balance transfer will be around 7 per cent (currently), the charge for additional purchases is likely to be around 20 per cent. But here’s the catch, the payments you make go to reduce your original balance transfer amount. New purchases and interest accrue and attract further interest at the higher amount.

In general, if you’re not able to pay your credit card each month switch to a lower rate card. If you think you’re still going to need to use your card for purchases now and then, go for the introductory low rate. If you can avoid using your card while paying off the balance transfer from your old card – consider the low rate for life of balance transfer type but don't ever use it for new purchases.

3 comments:

Abby said...

Great advice.

I actually just called around on my cards and convinced them to lower my rates.

Right now is the time to get your cards to do what you want: One of my friends actually got a lowered card rate after three months of non-payment... The credit card companies are hurting and need to keep customers able to pay.

Trevor said...

Excellent post.

Just like anything else, I suppose, there's a lot more to understand about credit cards than you'd think!

I heard recently of people that somehow qualify for the "no interest for the first year" cards, take the money and stick it into a CD at 5% and make a bunch of money.

Not sure how safe that is, but apparently it's possible.

Sidhartha said...

The information in this post is great. Your absolutely right when you said, if you can't pay your debts all off at the end of the month transfer them to a lower interest card.

I use to have roughly 10k in debt, what i did one day was I got fed up with being an indentured servant. So I got a loan from the bank that was 4% and paid off everything then paid off my loans slowly. It was hard but I've been debt free for over 5 years.

It took me awhile to practice the habit of not getting into debt when I did not have debt.

thanks for the great post.