Despite all the panic about lack of credit, I continue to receive offers for new cards almost every day. Whenever I receive a special offer, I read the disclosures very carefully. While I have been able to take advantage of some great offers which helped tremendously with cost overruns while I was building my townhouses (someday I may write about contractor budgeting or lack thereof!), I get very concerned about what can happen to anyone who is over-extended, misses a payment or otherwise falls into one of the credit card traps.
Here are some typical pitfalls and how to avoid them
1) Low rates for cash advances:
Check carefully! There is usually a fee associated with transfers. The typical fee is 3%, sometimes with a maximum amount, sometimes not. So if the “low rate” is 5% but there is also a 3% charge for the transfer, you are really paying 8%… not quite as low as advertised. Also, if you charge anything else on the card, new purchases will be at the current borrowing rate (anywhere from 9% to 29%). All payments are applied to the lower borrowing rate first.
How to make it work for you: Look for an offer that caps the transfer fee at under $100 and that does not have an expiration date. Make only one transfer for the full amount that you want to borrow. Be sure that you start with a zero balance; put the card away until the balance is paid off and NEVER miss a payment by even one day!
2) 0% for new purchases for a specified period of time:
The credit card companies make money here when you charge up a large balance and then carry that balance after the offer expires.
How to make it work for you:This can be a great offer as long as you pay off the balance before the rate increases and you are never late for a payment. If you miss a payment the rate can skyrocket overnight to something in the 35% range!
Read the disclosures very closely as these hidden pitfalls are not readily apparent. Sadly banks are not willing to make ethical choices for themselves so it is left to us, the consumer, to be educated and to take responsibility for our finances. Our best strategy is to live within our means and to pay off credit cards as the bill comes in. However, there may be times when circumstances drive us to temporarily take on some debt. There are good deals to be had, just be sure that you know what you are getting yourself into.
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