Credit card consolidation is a popular solution for those with significant credit card debt, usually distributed on three or four different cards. Basically, this means putting all your debts together on a single card, like transferring it all to one loan. Of course, the goal is to pick a card that offers better conditions than what you already have, in order not only to simplify, but also to reduce your payments.
Since there are so many offers out there, and lenders fight over your business, you can sometimes find solutions that can save you thousands of dollars per year. If you consolidate your debt to a credit card with low interest and 0% balance transfer, you can save considerably, and pay off your credit sooner (which, of course, is the main goal when dealing with credit card debt).
The most serious mistake people do when consolidating is to go though the entire process just to simplify their accounting, and they don't pay enough attention to how much they could save. Another mistake is to close your zero balance accounts when consolidating. This practically means you close some of your credit options, which is never a good idea.
When you plan to consolidate, call your banks and explain the situation. They want your business, and you'll be surprised how flexible and willing to negotiate they can be, once you explain to them that you have various options available to take your business someplace else.
There are many web sites offering solutions for debt consolidation. However, keep in mind that, while this is a comfortable and fast solution, you don't have the options to negotiate directly with the banks. Also, most often the best offers come from banks that want to keep your business, so make sure you give a change to the banks you've had a long-term relation with. If you're not pleased with the results, take your money elsewhere quickly.
Consolidation is often a necessity for students, new graduates, or people who have filed for bankruptcy some time ago. If you've handled your payments well and managed to clear up your record to a certain degree, there is no need to continue paying more than it's worth for your credit cards. Sit down and go through the numbers carefully, and think analyze the problem realistically. Don't forget to check your credit report and your credit rating before you start anything - it will help you plan and plead your case. Also, if your credit request gets rejected, don't forget to ask for your free copy of the credit report.
Of course, credit card consolidation is not a miracle solution for all your financial problems. On the contrary, you may find that it requires a lot of financial discipline to make the payment on time and to straighten things up. However, it is less confusing than having several small credits, and so it is easier to keep things under control.
There is also the option of getting credit counseling, if things get really confusing. A successful plan will make sure you make the payments on time and regularly, without putting a strain on other aspects of your life. Of course, it's a lengthy process, usually taking one or two years - but it's worth the trouble.
Sometimes, you can lower costs by consolidating your debt through a second mortgage - but be really careful about the hidden costs and problems - you may want to consult with a specialist or two before taking this step. Usually, this means that your home will become collateral, and you may lose it if things go wrong. Also, costs add up quickly and you may end up paying more than you initially thought.
Saturday, August 1, 2009
What You Should Know About Switching Credit Cards
With U.S. credit card debt at an all time high, many savvy consumers and investors are renewing their commitments to rid themselves of this burdensome and in most cases, unnecessary debt. In doing so they are constantly searching for the next best credit card with higher credit limits, lower annual percentage rates (APRs), and zero balance transfer offers. In fact switching credit cards has become as common as changing the battery in the fire alarm for some people and it has actually worked. So if you are amongst the thousands of Americans who are thinking of making a switch to improve your financial picture, before you do there are a few things that you should consider. They include how multiple inquiries for credit will affect your credit score and if the APR that applies to balance transfers after the introductory grace period still makes it a good deal. In addition to these two things you should also, as with everything you do, conduct your own research to find the best solution to meet your needs.
It makes sound economical sense to switch credit cards to save money in interest charges and fees. Especially when you consider the fact that for most credit cards the minimum monthly payment is so low that it barely covers the interest charges reducing your outstanding balance by just a few measly dollars from month to month. Its no wonder then that we jump at any new offer that comes our way. When deciding whether to switch cards though, you should keep in mind that every time you apply for a new credit card an inquiry from that particular creditor goes on to your credit file whether you receive the credit or not. Additionally, multiple inquires by different creditors negatively impacts your credit score and any account whether closed or unused remains on your credit file for at least seven years. Last thing, switching cards and closing accounts immediately after the switch also impacts your credit score.
When considering whether to take advantage of a 0% balance transfer offer, you should consider the amount of time that you’ll have before the “normal” APR applies to that balance and whether you’ll be able to pay that in full before the grace period is over. Additionally, in the event that you aren’t able to pay off the balance prior to expiration of the grace period, you should consider if the new APR that kicks in will be a significant savings from the card that you are considering transferring balances from and whether interest will be charged on just the remaining balance or the entire amount that you initially transferred.
To ensure that you are getting the best deal, you should do a thorough search of available credit cards before making a final decision on which institution to submit a new application for credit to. By doing so you will know upfront exactly what you are getting and whether there are cost savings to be realized, leaving very little room for surprises.
Switching credit cards is a smart choice for consumers who are trying to manage and conquer their debt. For the disciplined person, this is a very effective strategy to help you reduce your debt load. If you find yourself in the situation where you are presented with an opportunity to switch credit cards, please keep in mind the negative effect that multiple inquiries will have on your credit score as well as the opening of new accounts while simultaneously closing others. When done wisely, after conducting a thorough search of available options, switching credit cards can definitely help you to achieve your financial goals.
It makes sound economical sense to switch credit cards to save money in interest charges and fees. Especially when you consider the fact that for most credit cards the minimum monthly payment is so low that it barely covers the interest charges reducing your outstanding balance by just a few measly dollars from month to month. Its no wonder then that we jump at any new offer that comes our way. When deciding whether to switch cards though, you should keep in mind that every time you apply for a new credit card an inquiry from that particular creditor goes on to your credit file whether you receive the credit or not. Additionally, multiple inquires by different creditors negatively impacts your credit score and any account whether closed or unused remains on your credit file for at least seven years. Last thing, switching cards and closing accounts immediately after the switch also impacts your credit score.
When considering whether to take advantage of a 0% balance transfer offer, you should consider the amount of time that you’ll have before the “normal” APR applies to that balance and whether you’ll be able to pay that in full before the grace period is over. Additionally, in the event that you aren’t able to pay off the balance prior to expiration of the grace period, you should consider if the new APR that kicks in will be a significant savings from the card that you are considering transferring balances from and whether interest will be charged on just the remaining balance or the entire amount that you initially transferred.
To ensure that you are getting the best deal, you should do a thorough search of available credit cards before making a final decision on which institution to submit a new application for credit to. By doing so you will know upfront exactly what you are getting and whether there are cost savings to be realized, leaving very little room for surprises.
Switching credit cards is a smart choice for consumers who are trying to manage and conquer their debt. For the disciplined person, this is a very effective strategy to help you reduce your debt load. If you find yourself in the situation where you are presented with an opportunity to switch credit cards, please keep in mind the negative effect that multiple inquiries will have on your credit score as well as the opening of new accounts while simultaneously closing others. When done wisely, after conducting a thorough search of available options, switching credit cards can definitely help you to achieve your financial goals.
Transferring a Credit Card Balance
Are you staring at that attractive advertisement for switching credit card companies by transferring your balance from one card to another? While many of these offers are truly great deals, balance transfers and card-switching is not something to jump into, eager as you may be. You need to do your homework first: Do enough research and investigating in order to determine whether it in fact is worth it or a good idea to make the transfer. First, find out if it is in fact worth it. Generally speaking, these attractive advertisements and super credit card deals advertise very low introductory rates if you transfer your current balance from an existing credit card onto this new one. You can stumble upon these offers anywhere—online, in the mail, on a flyer or via a telephone call from credit card company salespersons—and you need to determine how great these deals really are, or if you’ll just end up paying much more in fees and interest in the long run. Read the fine print. Read everything. Read it through several times so that you make sure you understand what it is saying. It may appear to be a bunch of financial jargon that you might not think is very important, but the truth is, this information is valuable and critical to your decision in whether or not you make the big switch. Call the credit card company and ask any questions you might have. If the deal is solid and they want to make a sale, generally they should be able to help you out in any way. What do you need to find out about the deal? Here is an example. Let’s say that the advertised introductory rate is 6% (a low rate) on credit card B if you transfer your balance from credit card A, where you currently rack up an APR of 18% (a standard rate). You come across another offer, showcasing credit card C with an introductory rate of 9%. At first glance you may think, “Well, let’s go with credit card B—it’s the obvious choice here.” However, after reading the fine print, you discover credit card B’s special rate only last six months, and afterward the APR is 20%, whereas credit card C’s higher rate lasts for a year and the interest rate after that is 18%, the same as yours on credit card A. In other words, you have to factor in a lot of variables when making the decision to switch your balance from one credit card to another. Besides comparing the introductory rates being offered, the length of the offer and what the regular interest rate is, you’ll also need to take into account balance transfer fees, annual fees, late fees and other fees, as well as whether the teaser rate applies to balance transfers only or also purchases, among other considerations. Something else to keep in mind is that you may not actually qualify for the special rate being offered, depending on your credit history and credit rating. Before you make the big plunge, make sure you know exactly what you, yourself, will be getting. There may also be other conditions. For example, some credit card companies may penalize you for one late payment and take you off the introductory rate onto their regular rate, which may be higher than your current card’s rate. However, many credit cards with these introductory rates offer great deals for people interested in switching credit cards and transferring their balance over and can be more than worth it. The important thing is to do your research, read the fine print and ask questions to determine which credit card and deal is the right one for you. Once you’ve selected the right credit card offer, the next step is to fill out the balance transfer application form completely and accurately. Next, make the minimum payment on your original credit card while you wait for the balance transfer to go through. When it has gone through, the new company should send you a notice, after which you’ll need to verify the transfer with your old company so they can send you a zero-balanced billing statement. Finally, cancel your old card since you don’t need it anymore—it will also save you some temptation.
Avoid These Common Credit Card Balance
Transfer Mistakes
That offer to transfer your credit card balances sounds like a pretty good deal, doesn’t it? And it is, until you take out your magnifying glass and start reading all the fine print that goes along with the offer. What a lot of people don’t realize is that the lender making such an unbelievable offer wouldn’t be doing so if there wasn’t some way to benefit financially. These lenders actually feel safe in assuming that most people transferring balances won’t pay attention to the potentially costly details that accompany the offer. Transferring balances from a high-interest rate credit card to one with no or a lower interest rate can save you a substantial amount of money if you don’t fall victim to these common mistakes. 1. Balance transfer fees Rare is the balance transfer offer that doesn’t come with some sort of balance transfer fee. It might be a flat rate like $50 or $75 but it’s usually a percentage of the total amount of each balance transferred. Maybe 3% doesn’t sound like much but if you’re transferring several thousands of dollars, that fee can be hundreds of dollars! Although you may know by now to look for such fees, there’s something else you need to look for: whether or not there’s a cap on how high the balance transfer fee can go. Avoid those without caps. Before taking advantage of an offer, always do the math. If the balance transfer fee ends up being more than you would have paid in interest had you not done the transfer, then don’t transfer! 2. Other interest rates While there might be low or no interest on balance transfers, you’re still getting a new credit card which means you’ll still be able to use it to make purchases. Purchases though, normally aren’t part of the no or low interest deal. In fact, you can expect the interest rate on purchases or cash advances to be just as high as or higher than the credit cards you’re already using to make purchases. If you’re serious about chipping away at your debt, which is really the best reason to take advantage of balance transfer offers, then you really should stop accruing credit card debt! 3. Payment allocation If you do transfer balances to the new account, and you do make purchases on this new credit account, you may be surprised to find that your payments are not allocated the way you thought (assumed) they would be. Say you transferred $1,000 and during the last month you made new purchases totaling $200. You make a payment of $300 thinking you’ll clear away the new charges and start chipping away at the balance transfer amount. Next billing cycle you get your statement and find that the $200 in new purchases is still there – plus the couple of new charges you made since then. And all those purchases are compounding interest at a rate of 16, 19, 22% or more! What happened? Well, as stated in the fine print, the credit card company allocated your entire payment to the zero interest balance because – well it’s not making any money on that amount. But it certainly is on those new purchases! 4. Interest rate after intro rate expires That low or zero interest rate won’t last forever and you need to know how much it’ll increase when the stated period expires. That’s because any balance remaining afterwards is likely to be whacked with a much higher rate. To keep this from happening – which negates any savings benefits you’ve reaped so far – make sure you have a plan for paying off whatever balance you transfer before the rate increases. Also make sure you don’t miss a payment or make payments late. If you do you might find – without warning – that your zero percent no longer applies and you’re paying more in interest than you were before.
That offer to transfer your credit card balances sounds like a pretty good deal, doesn’t it? And it is, until you take out your magnifying glass and start reading all the fine print that goes along with the offer. What a lot of people don’t realize is that the lender making such an unbelievable offer wouldn’t be doing so if there wasn’t some way to benefit financially. These lenders actually feel safe in assuming that most people transferring balances won’t pay attention to the potentially costly details that accompany the offer. Transferring balances from a high-interest rate credit card to one with no or a lower interest rate can save you a substantial amount of money if you don’t fall victim to these common mistakes. 1. Balance transfer fees Rare is the balance transfer offer that doesn’t come with some sort of balance transfer fee. It might be a flat rate like $50 or $75 but it’s usually a percentage of the total amount of each balance transferred. Maybe 3% doesn’t sound like much but if you’re transferring several thousands of dollars, that fee can be hundreds of dollars! Although you may know by now to look for such fees, there’s something else you need to look for: whether or not there’s a cap on how high the balance transfer fee can go. Avoid those without caps. Before taking advantage of an offer, always do the math. If the balance transfer fee ends up being more than you would have paid in interest had you not done the transfer, then don’t transfer! 2. Other interest rates While there might be low or no interest on balance transfers, you’re still getting a new credit card which means you’ll still be able to use it to make purchases. Purchases though, normally aren’t part of the no or low interest deal. In fact, you can expect the interest rate on purchases or cash advances to be just as high as or higher than the credit cards you’re already using to make purchases. If you’re serious about chipping away at your debt, which is really the best reason to take advantage of balance transfer offers, then you really should stop accruing credit card debt! 3. Payment allocation If you do transfer balances to the new account, and you do make purchases on this new credit account, you may be surprised to find that your payments are not allocated the way you thought (assumed) they would be. Say you transferred $1,000 and during the last month you made new purchases totaling $200. You make a payment of $300 thinking you’ll clear away the new charges and start chipping away at the balance transfer amount. Next billing cycle you get your statement and find that the $200 in new purchases is still there – plus the couple of new charges you made since then. And all those purchases are compounding interest at a rate of 16, 19, 22% or more! What happened? Well, as stated in the fine print, the credit card company allocated your entire payment to the zero interest balance because – well it’s not making any money on that amount. But it certainly is on those new purchases! 4. Interest rate after intro rate expires That low or zero interest rate won’t last forever and you need to know how much it’ll increase when the stated period expires. That’s because any balance remaining afterwards is likely to be whacked with a much higher rate. To keep this from happening – which negates any savings benefits you’ve reaped so far – make sure you have a plan for paying off whatever balance you transfer before the rate increases. Also make sure you don’t miss a payment or make payments late. If you do you might find – without warning – that your zero percent no longer applies and you’re paying more in interest than you were before.
Balance Transfer Checks- Opportunities to Save
Tis' the season for credit card offers! In particular, it seems that from November through February marks an increase in marketing from credit cards you already have- particularly if you haven't been using them in awhile. Credit card companies spend quite a bit of money on marketing to attract new customers-and it's always cheaper to keep customers they have rather than trying to find new customers. What you may find waiting for you in your mailbox is a balance transfer offer from one of the credit cards you already have. The very best balance transfer offers are in the form of checks that offer 0% interest, but there are a number of other offers you might receive with 3.99% interest or 6% interest and no balance transfer fees. All of these offers may actually offer you a good deal depending on what you decide to do with them. For example, if you were to use a balance transfer check with 3.99% interest and a fee of 3% of your total amount to pay off a credit card or loan with 11% interest- as long as the dollar amount you borow from the balance transfer check is high enough, you're going to be saving enough money to make that a worthwhile fee to pay. You'll also be able to pay off the balance much sooner with the lower interest rate even by making the same amount of payments each month- since more of your payment goes to principal What many people don't realize is that they can actually get a balance transfer check from one of these low or no interest offers, and deposit the check into their own, personal checking accounts. Once you've deposited the money, you can use it to pay off a variety of debts that you owe that are costing you more than 3.99% interest (or whatever the interest rate is on the balance transfer check offer you've received); and save quite a bit of money! There have been people who purchase cars using a balance transfer check offer. If you're lucky enough to receive an offer for 0% interest on the life of the balance transferred (with checks); you can buy and pay for a car without any cash up front and without paying any interest. How great is that?! Other uses for the low or no interest balance transfer check offers: a buy now, pay later holiday shopping season! If you deposit the check from the balance transfer offer into your own account, you could use that money to finance your holiday shopping. This is a good idea if you get a 0% interest offer; or if you were planning to use a higher interest credit card to make your purchases. By using the balance transfer checks in your own checking account, you save on interest and have more time to pay for the purchases which means you aren't hurting your wallet too much. Home improvement is another good candidate for using balance transfer checks. Once again, just deposit the balance transfer check that you write to yourself into your own account, and then hit the home improvement store for the items you need to make the repairs or complete your latest project. As long as you make your monthly payments on time, you'll be able to keep your 0% or low interest offer on the balance transfer. Making even one payment late can be grounds for a rate increase, as well as late fees, and the financial gains of using the offer will be wiped out!
Are 0% Balance Transfer Offers Really Free?
Paying off credit card debt with 0% interest is a dream come true – which is exactly why a large number of credit card companies offer the promotions. They know it will attract new customers who have debt with other credit card companies to transfer that debt to their cards. But where is the value to the company offer the credit card balance transfer offer; if they let you repay that debt with 0% interest? Whenever you see credit card promotions that sound like they're going to be a good deal for you, it's best to look into them closely and make sure you read all of the “fine print”. A 0% balance transfer is typically good for a specific length of time, six months or twelve months are the most common terms. If you have several thousand dollars of debt on a higher interest credit card and take advantage of a 0% balance transfer offer for twelve months, the credit card company is betting on you still having a balance once the promotional period ends. When the six or twelve months of no interest repayments end, the balance will start being repaid with interest. A common mistake many people make when transferring balances under the six or twelve month 0% promotional offers, is not checking what the interest rate will be after the promotion ends. If you're moving a balance that you are currently paying 9% interest to a card with an interest rate of 19% after the promotional period ends - unless you are able to pay it off completely during the 0% interest period, you are not likely to benefit financially over the long term. You would have to start looking for another 0% balance transfer offer, or pay the higher interest until the balance is paid off. The other often overlooked factor of balance transfer offers with 0% interest is that most of them charge a transfer fee. The fee can range from 1% to 5% of the amount transferred. This fee can add up, depending on how much money you are transferring. There are some instances when the amount you pay for the balance transfer fee will result in more money paid than if you had just kept your balance on the card it was on and paid interest. To ensure you're actually getting a good deal, you'll want to play with the numbers and determine how much you'll spend for the life of the balance if you keep it on the card it's currently on, or if you move it to the new card with the 0% balance transfer offer, and don't forget to factor in a transfer fee if you have to pay one, and what the interest rate will be at the end of the promotional offer. Interest free balance transfer offers are also only good as long as you make your payments on time. This is important to keep in mind if you sometimes have difficulty keeping up with your payments, because if you send one a few days late you can lose your 0% interest rate and start paying a much higher interest rate. In order to make balance transfer fees work for you financially, it's actually better to find a low interest balance transfer offer that is fixed for the length of the balance. If you can transfer a few thousand dollars from a credit card with 9% interest or higher, to a card with 1.99% or 3.99% fixed interest on the balance transfer for the life of that balance, you will save hundreds of dollars in interest and actually make out better than the 0% offers (provided you know you can't pay off the entire balance before the 0% offer ends).
How Balance Transfers Affect Your Credit Score
Transferring balances with high interest rates to a credit card with a lower interest rate (or a 0% interest balance transfer offer) is a great way to pay your debt off faster and save money in the process. It's not as cut and dry as transferring the money from one place to another though, there are some other considerations to work out before you rush into the next balance transfer offer you qualify for: primarily, how does a balance transfer affect your credit score? Balance Transfers and Credit Scores – What's the Connection? Due to the formula used to calculate an individual's credit score, moving money from one credit card to another can actually cause some negative issues with your credit score that you may not have even realized. Credit scores are calculated with a top-secret formula, but we do know how much weight each component of our credit carries in the calculation:
Payment History – 35%
Outstanding Debt – 30%
Established Credit – 15%
New Credit – 10%
Type of Credit - 10%As you can see, the two biggest factors contributing to your credit score calculation involve how well you make your payments and how much debt you currently have. When considering balance transfers and how it will affect your credit score, first you should realize that most people mistakenly close out the old credit card once the balance has been moved to the new card – this is bad because it lowers the average age of your accounts and this accounts for 15% of your credit score. If most of your credit is recent, and you close your old account(s) as you transfer balances, you've suddenly decreased the average length of time you've had credit and your credit score will decrease as a result. In addition, if you close out your old credit card account after transferring the balance, you've lowered your debt to credit ratio, which accounts for a whopping 30% of your credit score. Closing the account gives you less credit available to you, which means you are suddenly using more of your available credit even though you haven't spent any more money. It's also true that opening a credit card account – like the one you want to transfer your higher interest balances to, will result in a lower credit score. New accounts make up 10% of your FICO credit score, so it's possible that opening the new account will take a hit on your account, but since it's only 10% of your overall score calculation, it shouldn't be as big of a factor as closing out the older account. If you transfer a balance to a new card, and leave the old card open – it will actually appear as if you owe less money because you have a higher available credit amount. You may experience a bit of a credit score increase from this which can counteract the decrease from opening a new account. Goals for Balance Transfers Your goal is to have less than 30% of your available credit (all cards included) utilized. You should always look to transfer balances to cards that give you the best rates, and leave your old accounts open. In the meantime, don't charge any more money until your total balance is well below the 30% utilization, and you'll soon see your credit score affected positively for these responsible financial decisions. In order to get a better understanding of where you stand with your credit score, don't forget you're entitled to a free credit report from each of the three credit reporting agencies annually. With the report, you can see how much credit you're using, and whether or not looking for a new balance transfer offer might help you raise your score and save money on interest.
Payment History – 35%
Outstanding Debt – 30%
Established Credit – 15%
New Credit – 10%
Type of Credit - 10%As you can see, the two biggest factors contributing to your credit score calculation involve how well you make your payments and how much debt you currently have. When considering balance transfers and how it will affect your credit score, first you should realize that most people mistakenly close out the old credit card once the balance has been moved to the new card – this is bad because it lowers the average age of your accounts and this accounts for 15% of your credit score. If most of your credit is recent, and you close your old account(s) as you transfer balances, you've suddenly decreased the average length of time you've had credit and your credit score will decrease as a result. In addition, if you close out your old credit card account after transferring the balance, you've lowered your debt to credit ratio, which accounts for a whopping 30% of your credit score. Closing the account gives you less credit available to you, which means you are suddenly using more of your available credit even though you haven't spent any more money. It's also true that opening a credit card account – like the one you want to transfer your higher interest balances to, will result in a lower credit score. New accounts make up 10% of your FICO credit score, so it's possible that opening the new account will take a hit on your account, but since it's only 10% of your overall score calculation, it shouldn't be as big of a factor as closing out the older account. If you transfer a balance to a new card, and leave the old card open – it will actually appear as if you owe less money because you have a higher available credit amount. You may experience a bit of a credit score increase from this which can counteract the decrease from opening a new account. Goals for Balance Transfers Your goal is to have less than 30% of your available credit (all cards included) utilized. You should always look to transfer balances to cards that give you the best rates, and leave your old accounts open. In the meantime, don't charge any more money until your total balance is well below the 30% utilization, and you'll soon see your credit score affected positively for these responsible financial decisions. In order to get a better understanding of where you stand with your credit score, don't forget you're entitled to a free credit report from each of the three credit reporting agencies annually. With the report, you can see how much credit you're using, and whether or not looking for a new balance transfer offer might help you raise your score and save money on interest.
Easy Guide To Transferring a Credit Card Balance
Transferring a high interest credit card balance to one with a better interest rate and/or better overall terms and features is usually a good way to reduce the amount of money you pay back on your existing debt. Depending on the “better” credit card you select, you may also be able to benefit from a rewards program or gain other features you didn't already have – including travel accident insurance coverage or an extended warranty program for new purchases made with the card. There are a few instances when a balance transfer is not the great deal it appears at first glance though, so it's important to do your research before moving your accounts around. If you want to take advantage of a balance transfer offer, use this guide for a smooth transition from one card to the other, and avoid costly or time consuming mistakes: Step One: Find a better credit card with a balance transfer offer. There is no point moving money from one credit card to another unless you are going to benefit from it in some way. Sometimes people are mislead by the introductory rates and promotional offers – so it is important that you dig a little beneath the surface to see what sort of rates you'll be charged once the promotional period ends. When looking at possible cards to replace your existing credit card, make sure you find out the following information in order to make an accurate comparison between your existing card and the new card: What is the introductory rate and when does it end? Does the introductory rate apply to new purchases only? Does it apply to balance transfers? What is the cards APR (annual percentage rate) once the introductory offer is over? Does the card have an annual fee? How much is it? This is an important consideration when looking at a card to move your existing balances to - What does the card charge for a balance transfer fee? Many cards charge 3-4% fees for transferring balances. If you've got a $4,000 balance on your card that you're moving to a new card, you're looking at a fee between $120 and $160 just to move the balance. If you're going to pay a balance transfer fee, you're going to need to save a whole lot of money in interest over the life of the balance on the new card in order to make that fee worth it. Step Two: What are your chances of getting approved for the new card? Just because a credit card offers a 0% or 2% interest rate on balance transfers does not mean that you will be approved for that offer. Cards always put their best foot forward; but sometimes people are approved for the cards under different terms, based on their credit scores and payment histories. Take a close look, because often the credit card you apply for will tell you that if you don't qualify for the terms of the offer they will issue you a credit card with higher interest rates or different overall terms. If this happens, will the higher rates be beneficial to you, or will you just end up with a second credit card that charges a fortune in fees and interest and the temptation to spend more because you have a new credit line available? Step Three: Apply If you find a card with a great offer that you've compared closely to your existing card and feel that you will save money through the new, lower interest rate and/or through the rewards program the new card offers – AND you've considered your realistic chance of being approved for that card and all seems ready to go; it's time to apply. When applying for the new card, make sure to fill out the balance transfer portion at the time of application. The reason for this is sometimes the balance transfer offers are only good for immediate balance transfers that occur at the time of account opening. Balance transfers that are initiated later may be considered a cash advance and do not enjoy the same promotional terms your initial transfers do. Step Four: Stop Using Old Card If you've transferred the balance to a new and improved credit card, stop using your old credit card. Cut it up or put it away so you aren't tempted to charge on it. If you transfer the balance and then continue to use your old card, you've completely defeated the purpose of moving the money and now have TWO credit cards to pay off!
PIN versus signature conundrum
As for which method of debit card use -- PIN or signature -- is most secure, consumers are bit schizophrenic. According to a STAR/First Data study in 2005, 47% of consumers preferred PIN debit because they felt it was more secure. But the December 2005 issue of the Chicago Fed Letter, published by the Federal Reserve Bank of Chicago, noted that "cardholders perform twice as many signature-based debit transactions as PIN-based debit transactions. Cardholders in the United States performed 10.3 billion signature-based transactions and 5.3 billion PIN-based transactions in 2003."
And with all that activity, only 20% of those surveyed in the STAR/First Data study were aware that their debit cards have the same zero liability coverage as their credit cards.
"While debit cards offer much in the way of convenience, with equal protection against fraud and loss, they don't appeal equally to everyone," McBride says. "Consumers who always pay their credit card balances in full will find that a rebate credit card is far more attractive than a debit card due to the higher rewards and additional float time on the money."
Debit card use will continue to grow because consumers find them an efficient way to manage money. Nevertheless, there are still a few aspects, such as daily usage limits, overdraft risk and blocking, that need to be considered.
Here's how blocking works, according to the FTC: You use a credit or debit card when you check into a $100-a-night hotel for five nights. At least $500 of your available credit or available amount in your checking account is immediately reduced by that amount. In addition, hotels and rental car companies often add anticipated charges for "incidentals" like food, beverages or gasoline to the blocked amount.
And with all that activity, only 20% of those surveyed in the STAR/First Data study were aware that their debit cards have the same zero liability coverage as their credit cards.
"While debit cards offer much in the way of convenience, with equal protection against fraud and loss, they don't appeal equally to everyone," McBride says. "Consumers who always pay their credit card balances in full will find that a rebate credit card is far more attractive than a debit card due to the higher rewards and additional float time on the money."
Debit card use will continue to grow because consumers find them an efficient way to manage money. Nevertheless, there are still a few aspects, such as daily usage limits, overdraft risk and blocking, that need to be considered.
Here's how blocking works, according to the FTC: You use a credit or debit card when you check into a $100-a-night hotel for five nights. At least $500 of your available credit or available amount in your checking account is immediately reduced by that amount. In addition, hotels and rental car companies often add anticipated charges for "incidentals" like food, beverages or gasoline to the blocked amount.
How to get money back
So what happens if a cardholder has a problem and wants her money back?
"The process varies by issuer," Krattli says. "Call the bank, let them know there's a discrepancy -- that they didn't receive what they ordered, didn't like it, etc. A customer service representative will talk them through some of the steps that will be taken. In most cases, they get the money back in their checking account within five business days."
Sloane thinks consumer concern about loss will continue to push the debit card business. "Zero liability hasn't worked itself all the way out on the debit side, and the next phase will be offers of recovery. A bank will say, 'We'll help you recover accounts.' Maybe five years from now the banks will offer some kind of insurance policy for the best customers."
"The process varies by issuer," Krattli says. "Call the bank, let them know there's a discrepancy -- that they didn't receive what they ordered, didn't like it, etc. A customer service representative will talk them through some of the steps that will be taken. In most cases, they get the money back in their checking account within five business days."
Sloane thinks consumer concern about loss will continue to push the debit card business. "Zero liability hasn't worked itself all the way out on the debit side, and the next phase will be offers of recovery. A bank will say, 'We'll help you recover accounts.' Maybe five years from now the banks will offer some kind of insurance policy for the best customers."
Equal protection
Another feature of credit cards that has been added to debit cards is fraud and loss protection. Discover Card, Visa and MasterCard branded debit cards now have the same fraud and loss protections as credit cards. In Bankrate's survey, every bank that offers debit cards provides fraud and loss protection.
The Fair Credit Billing Act and the Electronic Funds Transfer Act provide procedures for consumers to follow if a credit or debit card is lost or stolen.
Under the Fair Credit act, your maximum liability for a stolen credit card is $50.
The Electronic Funds act, which covers debit cards, says liability is dependent on how quickly you report the loss or theft. If you report the theft within two business days, you are liable only for $50 in unauthorized use. If you don't report the loss in two business days, according to the Federal Trade Commission, "you could lose up to $500 because of an unauthorized transfer. You also risk unlimited loss if you fail to report an unauthorized transfer within 60 days after your bank statement containing unauthorized use is mailed to you. That means you could lose all the money in your bank account and the unused portion of your line of credit established for overdrafts."
While the FTC's warnings about losing a check card are dire, the reality may be much less scary. Over the past few years, Discover Card, Visa and MasterCard have extended their zero-liability protection to debit cards. In effect, check cards now have the same protections as credit cards.
For Visa, offering zero liability "makes sense," Krattli says. "We make sure you have acceptance wherever you shop and make you feel as secure as you can be about your purchase. That's part of our brand promise: payment options, acceptance, comfort and security for purchases."
Despite the coverage, McBride has a caveat for consumers. "While many debit card issuers offer the same protection against fraud as that of credit cards, it still means closing the barn door after the horse is already out. It may take some time to restore the funds to the account, unlike a credit card where the cardholder can withhold payment on any fraudulent purchases."
Sloane also advises consumers to find out how their bank processes debit transactions.
"Visa has extended zero liability, but the banks have to agree. A transaction must go through the Visa or other network in order to be covered. You have to ask your bank whether zero liability applies to that debit card. Otherwise, they'll say you're exposed to the FTC rules. What is not discussed much is how long it takes to get the money back into the checking account rather than credit back."
The Fair Credit Billing Act and the Electronic Funds Transfer Act provide procedures for consumers to follow if a credit or debit card is lost or stolen.
Under the Fair Credit act, your maximum liability for a stolen credit card is $50.
The Electronic Funds act, which covers debit cards, says liability is dependent on how quickly you report the loss or theft. If you report the theft within two business days, you are liable only for $50 in unauthorized use. If you don't report the loss in two business days, according to the Federal Trade Commission, "you could lose up to $500 because of an unauthorized transfer. You also risk unlimited loss if you fail to report an unauthorized transfer within 60 days after your bank statement containing unauthorized use is mailed to you. That means you could lose all the money in your bank account and the unused portion of your line of credit established for overdrafts."
While the FTC's warnings about losing a check card are dire, the reality may be much less scary. Over the past few years, Discover Card, Visa and MasterCard have extended their zero-liability protection to debit cards. In effect, check cards now have the same protections as credit cards.
For Visa, offering zero liability "makes sense," Krattli says. "We make sure you have acceptance wherever you shop and make you feel as secure as you can be about your purchase. That's part of our brand promise: payment options, acceptance, comfort and security for purchases."
Despite the coverage, McBride has a caveat for consumers. "While many debit card issuers offer the same protection against fraud as that of credit cards, it still means closing the barn door after the horse is already out. It may take some time to restore the funds to the account, unlike a credit card where the cardholder can withhold payment on any fraudulent purchases."
Sloane also advises consumers to find out how their bank processes debit transactions.
"Visa has extended zero liability, but the banks have to agree. A transaction must go through the Visa or other network in order to be covered. You have to ask your bank whether zero liability applies to that debit card. Otherwise, they'll say you're exposed to the FTC rules. What is not discussed much is how long it takes to get the money back into the checking account rather than credit back."
Debit cards: A good deal gets better 2
With most debit cards, however, points are earned only on signature purchases and aren't earned in specified cases, including ATM withdrawals, balance transfers or payments made to prepaid or reloadable cards.
"I guess consumers have shown that they do respond to rewards, even when those rewards are less substantial than on the credit side," Sloane says. "I still believe the primary consumer motivation is better management of their finances. Secondary motivation is the thought that, 'as long as I'm using my debit card, I might as well get something back from that.' "
Regardless of the differences between credit card and debit card reward programs, one has to evaluate how one uses them.
"Credit card reward programs only work if you use the rewards and pay off the balance every month," McBride says. "If you do pay off your balance every month, you have no need to use a debit card. You can use the issuer's money until the bill comes and keep your own cash in an interest-earning account."
"I guess consumers have shown that they do respond to rewards, even when those rewards are less substantial than on the credit side," Sloane says. "I still believe the primary consumer motivation is better management of their finances. Secondary motivation is the thought that, 'as long as I'm using my debit card, I might as well get something back from that.' "
Regardless of the differences between credit card and debit card reward programs, one has to evaluate how one uses them.
"Credit card reward programs only work if you use the rewards and pay off the balance every month," McBride says. "If you do pay off your balance every month, you have no need to use a debit card. You can use the issuer's money until the bill comes and keep your own cash in an interest-earning account."
Rewards a mixed bunch
Though not as robust as reward programs on credit cards, debit card reward programs are still a good thing for those who use debit as an alternative to credit cards, cash or checks.
For example, the Citi ThankYou program awards one point for every $3 using a PIN and one point for every $2 spent for a signature transaction. The ThankYou program with the Citi Diamond Preferred Rewards Card gives five points for every dollar spent at grocery stores, gas stations and drugstores, and one point per dollar at every other type of retailer, including online and phone purchases.
Comerica Bank's World Perks travel rewards program has two tiers: For a $20 annual fee, cardholders earn one mile for every $2 spent, and for $55 annually, they earn one mile per dollar spent.
The variety of rewards is also broad. Washington Mutual's free checking account gives 3 cents on every purchase up to $250 per year. It also offers "WaMoola for Schools," which earns a point per purchase for the designated school. Points are converted to cash once a year and donated to the school.
Chase has three types of debit card awards. Debiters can earn miles with a Continental Airlines Banking Card (two tiers: $25 annual fee equals one mile for every $2 spent; $65 annual fee brings one mile per dollar) or a United Mileage Plus Check Card ($25 annual fee, one mile per $2 spent). Or they can sign up for free for Chase Visa Extras, which gives one point for every dollar spent on qualifying purchases.
For example, the Citi ThankYou program awards one point for every $3 using a PIN and one point for every $2 spent for a signature transaction. The ThankYou program with the Citi Diamond Preferred Rewards Card gives five points for every dollar spent at grocery stores, gas stations and drugstores, and one point per dollar at every other type of retailer, including online and phone purchases.
Comerica Bank's World Perks travel rewards program has two tiers: For a $20 annual fee, cardholders earn one mile for every $2 spent, and for $55 annually, they earn one mile per dollar spent.
The variety of rewards is also broad. Washington Mutual's free checking account gives 3 cents on every purchase up to $250 per year. It also offers "WaMoola for Schools," which earns a point per purchase for the designated school. Points are converted to cash once a year and donated to the school.
Chase has three types of debit card awards. Debiters can earn miles with a Continental Airlines Banking Card (two tiers: $25 annual fee equals one mile for every $2 spent; $65 annual fee brings one mile per dollar) or a United Mileage Plus Check Card ($25 annual fee, one mile per $2 spent). Or they can sign up for free for Chase Visa Extras, which gives one point for every dollar spent on qualifying purchases.
Convenience and security
The rise of debit card use is attributable to several factors, primarily money management, convenience and security. "Significant awareness was raised about the high interest rates charged by credit cards and the fees for late payments," Sloane says. "Consumers have been educated about the benefits of debit cards. Consumers see it as a way to budget their money more effectively."
"The No. 1 reason consumers are using debit cards is convenience," says Nancy Krattli, the vice president of consumer debit products at Visa. "They provide convenient money management -- you don't have to carry cash, have exact change, and there is no record-keeping because it's on the bank statement."
She says Visa's cardholder surveys indicate that people choose debit for day-to-day transactions such as gas, groceries and drugstore purchases. But, increasingly, they're using them for smaller-ticket transactions such as fast food, coffee at Starbucks, even parking. "The average ticket has gone down," Krattli says. "In 2004 the median was $24, and it has come down to $22 now."
A Visa survey from August 2006 showed that 55% of debit card holders use their cards for purchases of less than $25, and 86% cited convenience as their primary reason.
"The No. 1 reason consumers are using debit cards is convenience," says Nancy Krattli, the vice president of consumer debit products at Visa. "They provide convenient money management -- you don't have to carry cash, have exact change, and there is no record-keeping because it's on the bank statement."
She says Visa's cardholder surveys indicate that people choose debit for day-to-day transactions such as gas, groceries and drugstore purchases. But, increasingly, they're using them for smaller-ticket transactions such as fast food, coffee at Starbucks, even parking. "The average ticket has gone down," Krattli says. "In 2004 the median was $24, and it has come down to $22 now."
A Visa survey from August 2006 showed that 55% of debit card holders use their cards for purchases of less than $25, and 86% cited convenience as their primary reason.
Debit cards: A good deal gets better
With no fees for transactions, no debt added to high-interest credit cards, "zero liability" fraud protection and new rewards programs, the debit, or check, card is proving to be a grand slam for consumers.
Debit card fees for transactions, whether PIN or signature, have nearly disappeared, according to Bankrate.com researchers who surveyed the 10 largest banks and thrifts in each of 10 top markets. Only seven of the 100 institutions charge a point-of-sale fee for PIN transactions. Five of those charge per transaction and two charge a monthly fee.
The public loves them Debit cards have become nearly universal. Of the 100 banks surveyed, only three do not offer them. Of those that do, only two banks, Bank of the West in San Francisco and Firstrust Bank in Philadelphia, charge an annual fee to have a card.
This is very good news for consumers, who have embraced debit cards as their preferred purchasing plastic. According to the Federal Reserve, since 2003, debit cards, which draw money from your checking account, have been used to make more purchases than credit cards, which are used to borrow money.
"The competitive environment for banks demands that they position themselves to the consumer as offering low-cost checking accounts," says Tim Sloane, the director of the Debit Advisory Service at Mercator Advisory Group, a payments-industry research firm. "Core to the value proposition for consumers is debit cards. The once-common practice of charging transaction fees on debit cards has disappeared."
Greg McBride, a senior financial analyst at Bankrate, agrees.
"Point-of-sale fees for PIN-based debit card transactions appear to be more myth than reality," McBride says. "Nonetheless, cardholders should always verify the terms with their issuers to avoid being surprised."
For signature transactions, only Wells Fargo has a fee, and that is $1 per month for some customers, regardless of the number of transactions. "Some customers -- depending on account type and applicable waivers -- are charged a $1 usage each month in which they make a purchase using their check card or their ATM card," says Lisa Westermann, a spokeswoman for Wells Fargo. "The fee is charged for unlimited PIN-based and signature-based point-of-sale transactions and is only charged if either card has been used for point-of-sale purchases during the statement cycle."
Debit card fees for transactions, whether PIN or signature, have nearly disappeared, according to Bankrate.com researchers who surveyed the 10 largest banks and thrifts in each of 10 top markets. Only seven of the 100 institutions charge a point-of-sale fee for PIN transactions. Five of those charge per transaction and two charge a monthly fee.
The public loves them Debit cards have become nearly universal. Of the 100 banks surveyed, only three do not offer them. Of those that do, only two banks, Bank of the West in San Francisco and Firstrust Bank in Philadelphia, charge an annual fee to have a card.
This is very good news for consumers, who have embraced debit cards as their preferred purchasing plastic. According to the Federal Reserve, since 2003, debit cards, which draw money from your checking account, have been used to make more purchases than credit cards, which are used to borrow money.
"The competitive environment for banks demands that they position themselves to the consumer as offering low-cost checking accounts," says Tim Sloane, the director of the Debit Advisory Service at Mercator Advisory Group, a payments-industry research firm. "Core to the value proposition for consumers is debit cards. The once-common practice of charging transaction fees on debit cards has disappeared."
Greg McBride, a senior financial analyst at Bankrate, agrees.
"Point-of-sale fees for PIN-based debit card transactions appear to be more myth than reality," McBride says. "Nonetheless, cardholders should always verify the terms with their issuers to avoid being surprised."
For signature transactions, only Wells Fargo has a fee, and that is $1 per month for some customers, regardless of the number of transactions. "Some customers -- depending on account type and applicable waivers -- are charged a $1 usage each month in which they make a purchase using their check card or their ATM card," says Lisa Westermann, a spokeswoman for Wells Fargo. "The fee is charged for unlimited PIN-based and signature-based point-of-sale transactions and is only charged if either card has been used for point-of-sale purchases during the statement cycle."
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