Balance Transfer and Card Rewards

[boosami]

I have a friend who uses several different credit cards, and has a balance on a few of them. Aside from the already existing balances, he now pays off everything he charges each month to get rewards. However, the APR spread across these cards is high, and he wants to save some interest and escape it.

His plan was to get a 0% promotional APR card and transfer the balances to it. The card he found has a 12 month promo and really good rewards. He wants to continue charging on this new card and paying it off each month.

I explained to him that most (all?) credit cards will put any payments toward the lowest APR charges first. In this case, the 0% balance transfer. That means even if he pays the equivalent of all the new charges, he will still pay interest on them.

Anyone know of a card that breaks this mold?

[neatdesign]

Most credit card companies set up their payment allocations so that the lower APR balance gets paid down first, while the higher APR balance languishes there and barely gets ANY payment applied to it until the lower APR balance is completely eliminated. Adding purchases on top of the BT may add YEARS to the time it would take for him to pay it off -- that's no exaggeration.

It's a BAD IDEA!

The thing is, it's not a card that needs to "break the mold" -- your friend needs to change his habits.

I have been in your friends shoes. I have a BOA card that earns rewards and thought we could use it for everyday purchases and pay it off in full each month. Guess what? We used it, but we didn't pay it off. We'd pay some of it off, more than the minimum, but it still had a balance each month. Before we knew it, it ballooned up to $6800. And that's on top of other existing credit card debt we have.

We thought we could be responsible enough to pay it off each month, but it was too easy not to. It's embarrassing to admit that, because we're both highly educated, intelligent people. But that's the truth. Your friend sounds like he's trying to have his cake and eat it too, and that will only cause him more problems.

~ Jenney

[Ima saver]

Well, I do have a chase rewards card that we charge on, every month. But it is for building supplies and we pay it off every month. I earn at least $50 a month cash back on it. But it is a bad idea to charge if you are not going to pay it off. The balance transfer is not a good idea either.

[boosami]

Thanks for the advice. I just wondered if there was a card out there that you could choose what part the payment were applied to, like on a mortgage or car loan where you can ask that overpayment goes toward the principle amount.

[boosami]

Most credit card companies set up their payment allocations so that the lower APR balance gets paid down first, while the higher APR balance languishes there and barely gets ANY payment applied to it until the lower APR balance is completely eliminated.

My Amex allows you to choose your payment allocation. I have never used it, as I pay in full each month, but each month I see it available as an option on my statement.

The way it works is that some charges qualify for "flexible payments" that you can pay off over time like a regular credit card. Say I charged $10k last month and $8k qualified for flex pay. When I pay my bill, I can choose to pay off the $2,000 while carrying over and incurring interest on the $8k. The $8k is itemized separately on my bill and only that amount is used to calculate interest. I could continue to use my card each month and PIF the new charges while paying a minimum on the $8k financed, until it was paid off.

This is the kind of thing my friend wanted to do (if possible) with a balance transfer. Sound like there isn't a card that will allow it, though, other than my Amex and he will not be able to qualify for it.

[hboogz]

So, if you were to have 3 different CC's with varying balances on them and varied APR's, all high --- in wouldn't be a good idea to Balance Transfer for 0% and pay that balance down ?

[boosami]

So, if you were to have 3 different CC's with varying balances on them and varied APR's, all high --- in wouldn't be a good idea to Balance Transfer for 0% and pay that balance down ?

Yes, this would save you interest if you paid in full before the promotional 0% ran out. If you miss a payment or can't pay in full within that time they will charge you for all the past interest, negating any savings you might have expected.

As people on this board will note, however, moving debt around isn't an effective way to get rid of it--you simply have to pay it off.

[hboogz]

Thanks for the explanation boosami.

Apologize for not prefacing my previous post by saying it was my first, but here goes:

I've been actively looking at this site for a while and i now look forward to both participating and interacting with all of you.

Ok -- I don't want to hijack this thread by any means, but my question follows a very similar vein.

let's say you have 3 CC'S all of which have above 40% of debt against the available credit. Understanding the best approach is to pay down debt irrespective of CC and APR's -- wouldn't it still be prudent to consolidate all 3 cards into a card with an available credit that is higher than the combined credit limit of all 3? thus lowering your outstanding debt vs available credit ? and boosting your FICO?

[boosami]

let's say you have 3 CC'S all of which have above 40% of debt against the available credit. Understanding the best approach is to pay down debt irrespective of CC and APR's -- wouldn't it still be prudent to consolidate all 3 cards into a card with an available credit that is higher than the combined credit limit of all 3? thus lowering your outstanding debt vs available credit ? and boosting your FICO?

In the long term, yes. Anytime you open a new card (without incurring any new charges), you will be improving your debt utilization ratio because you have more available credit. This can lead to an increase in your FICO score. Short term, however, your FICO goes down when you open new trade lines. Especially if you open multiple in a short period of time.

To do what you are suggesting, though, you have to be sure you qualify for a high enough limit to consolidate. Also, you'll want to check transfer fees, how long the promotion lasts, what the APR will be after the promotion, and a number of other variables that can cause problems down the line.

Additionally, creditors don't rely solely on the FICO when evaluating a client. They take things into consideration that FICO does not touch, like income and other financial obligations. Moving debt around won't change that data.

If you want more specific advise, I suggest posting a new thread and everyone would be happy to help! Welcome to the board.