Balance Transfers: Bankruptcy Substitute?

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Balance Transfers: Bankruptcy Substitute?

Balance transfers are often advertised in both Oregon and Washington with an offer of radically reduced introductory rates for borrowers who are willing to move their balances onto a new credit card. Additional credit cards though are almost never the answer for managing debt. In fact, they usually exacerbate the problem. Many people keep their existing credit card accounts open, amassing even greater debt. Balance transfers do not address the core issue for most debtors: insufficient income to reduce existing debt. In contrast, Chapter 7 and Chapter 13 bankruptcies are effective because they address the root cause by eliminating or reducing the total amount of debt.

The dangers presented by balance transfers are usually found in the small print. Low preliminary interest rates are used to get people to transfer their balances onto one credit card, and often seem so attractive that the concealed fees and costs are difficult to detect let alone understand. The low interest rate usually lasts for only a limited amount of time. Soon the introductory interest rate rises, sometimes to a higher rate than that of the original credit card. The low introductory rate period is often cancelled if the borrower makes any late payments on the account. The interest rate offered may only be applicable to balance transfers, and a different interest rate will be applied to all cash advances and purchases. Usually, payments made will be applied to the lower balance first, leaving the balances with the higher interest rates continuing to rack up interest.

The costs involved with a balance transfer can quickly eliminate any would be financial gain from a low introductory interest rate. Common fees include monthly finance fees, balance transfer fees, annual fees, cash advance fees, over-the-limit fees and convenience check fees. Borrowers often end up paying more in fees than the amount they are saving with the lower interest rate. The lenders also frequently push expensive add-ons and profit boosters, like credit protection insurance, which can cost as much as $45 a month. The fee is often charged up front, meaning the borrower is required to pay the interest each month on the extra amount.

Frequent balance transfers often damage a person’s credit score. The increased activity can make a person appear to be a credit risk, and having too many active accounts can be derogatory to a person’s credit score.

Really think it over before you start transferring balances from one credit card to another. Examine all of your options and speak with your attorney before making a financial decision that could have long-term detrimental implications.

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