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Rebounding from overspending on the Holidays

Karen Gibbs

Karen, I overspent for holiday gifts.  What are your thoughts on zero-interest rate cards and on balance transfers to them?

- Nan, Clarksville

wallet with credit cardsNan, you are not alone.  According to the National Retail Federation, Americans spent, on average, $802 during the 2014 holiday season.  We probably spent that much, if not more, this year.

To encourage shoppers to buy what they can’t afford, many retail outlets offer zero-interest rate card at point-of-sale.  They may even offer a discount on your purchase if you sign up today.

It can be very tempting when you want to buy something special for that someone special or, if accompanied by children, buy something that they see and want right now.  However, beware of temptation; it can lead you to a dangerous place.

The zero-interest rate card looks good on the surface, but pull back the layers and you see that it is a money maker for the issuer.  The promotional period only lasts for a stated time.  You must pay on time or you void the zero-interest rate agreement.  You could see your zero-interest rate replaced with the 24% charged by most retailers on the full amount charged, even if you’ve made some payments.

If you have a good credit score and a history of paying off your monthly balance, a zero-interest rate card may work for you.  Unfortunately, if you have poor credit and are late or miss a payment, you will get socked with high interest rate charges from the very beginning of the transaction and on the total amount.
As with everything, read the fine print.  Make sure you understand the terms and your obligation.  Make an effort to pay more than the minimum payment.  Pay off the debt entirely before the zero-interest rate timeframe expires.

Balance transfers can be a great way to save money while paying off debt.  However, while the transfer rate may be zero, most financial institutions charge a one-time transfer fee – generally 3% of the balance transferred.  If transferring your balance from a higher rate, make sure that the lower rate is more than 3% lower than what you are currently paying.

Read the fine print to make sure you understand the terms of the agreement and what is expected of you.  Make sure you know when the promotional period ends and pay off this balance transfer before that date to avoid paying more interest.  Don’t increase your credit limit and avoid making new purchases; they won’t be part of the lower rate transfer offer.

Lastly, cut up the higher rate credit card, but don’t close the account. Closing the account will negatively affect your debt-to-available credit ratio.  Transferring the balance will temporarily ding your credit score, but on time payments and a declining balance will repair that damage rather quickly.

Good luck!

- Karen

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