It is relatively certain that we’ll soon be seeing another rate increase by the Fed which will impact the Prime Rate, which issuers use as an additive factor to the interest spreads of 12% to 25% for credit card rates. Not to worry… a 25 basis point increase means it will cost an additional $2.50 annually per $1000 in debt. But, it is a good time to look at your cards and decide if you are well positioned. This article suggests looking at balance transfers as a tool, which we’ll talk about for a few moments, then I will show you the “Riley-method” which puts some deeper insight to managing your way through Balance Transfer Rates. Forbes suggests:• Finding a 0% balance transfer card is the easy part.
• …however it requires a lot more than just comparing transfer fees and the length of the 0% introductory rate.
• Ask these questions:
o How much debt do you want to transfer
o Which cards will you transfer the debt from
o What happens if you don’t pay off the 0% deal until it expiresAll good questions but the author has a huge miss. He forgot to mention the impact of balance transfer fees, which consumers often do not consider. This is all about net cost. I personally have been on both sides of the equation with balance transfers for nearly 40 years, both as an industry professional at 3 major card issuers (Citi, Chase & Wachovia), and as a consumer who rarely uses cash to pay for anything. I like the points, carry a very good FICO score, and have some old, established accounts (my mortgage is on file as being open 28 years) as well as several new cards.When I want to use a balance transfer to move debt (which I rarely carry), or to finance a major purchase like a new refrigerator or TV, I go right to the terms of the agreement. Typically, what you will see is a fee (such as $5% or 1%, which ever is higher), an APR rate (Often 0% on the special offer) and a term (ends in 10 months). If I am paying my life insurance bill which could be $4,000 for the yearly premium, and there is a 1% balance transfer fee and a 10 month term, that means I can pay this off at net rate of .083% when the balance transfer fee is added in. Against a typical bank card interest rate of 18%, this is a winner.Now, I can come out positively by using a different credit card (since balance transfers rarely get points) to do the transaction, then after that posts, do a balance transfer to pay off the points-based card. With this, instead of paying a net $33.33 for the transaction, I get 4,000 points on top of it, which is a net gain of $6.67 based on the value of a point at a penny. It certainly is not much but a little math can save you money and it is somewhat entertaining to create a better-than-expected deal..So, the Forbes piece is a decent read, but if you want to save money, follow the “Riley method”!The takeaway on Peer-to-Peer is this: it is novel but it often lacks the structure of regulated lending. Banks aren’t necessarily sexy but they have established procedures, answer to regulator, and in one form or another, will be here tomorrow.
Overview by Brian Riley
, Director, Credit Advisory Service at Mercator Advisory Group
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