Some of the steps that consumers take to reduce their debt and improve their financial situation can actually make things worse. Even moves suggested by banks and financial companies can have serious consequences for borrowers.
Credit card balance transfers are a perfect example of a financial tool that can often do more harm than good. In certain circumstances, transferring your credit card balance from one card to another could save you a significant amount of money. You can benefit from lower, promotional rates and free up more available credit.
Much of the time, however, a balance transfer only delays the need for payment and may actually increase the overall debt load of a household. If you hope that a balance transfer could fix your financial situation, it may be time to really consider your choices.
Balance transfers usually are not free
When you open a new credit card or line of credit, it is common for the issuing bank to incentivize you to use it by offering a promotional interest rate. In some cases, credit card companies may offer interest rates as low as zero percent for a fixed amount of time. Compared with interest rates over 20 percent, which are quite common for credit cards, that 0 percent interest may seem like a boon.
However, borrowers considering the transfer of a balance should make sure they read the fine print. Credit card transfers often charge a fee, which is usually a percentage of the amount transferred. Five percent or more is not uncommon. Like rewards points, balance transfers can create more issues than they solve.
In addition to increasing your overall balance thanks to that fee, you will have to pay interest on the entire balance until you pay it off. Even if there is a low introductory rate, when that rate expires, the company will likely retroactively apply the higher, new interest rate to your account balance. That means you get hit with a year or more of interest all at once. In some cases, that interest could leave you with yet another maxed out line of credit that you have to pay on but cannot access.
Bankruptcy actually gets rid of unsecured debt
Whether you choose to file Chapter 7 or Chapter 13 bankruptcy, you will have the opportunity to discharge your unsecured debt. These debts often include credit cards and medical debts.
Debts secured by property, such as vehicle loans and mortgages, will need to be renegotiated and reaffirmed as part of the bankruptcy process. However, you can do away with those high credit card balances and get a fresh start that would not be possible if you simply transferred the balance from one card to another.
If you find yourself struggling to make ends meet or to make minimum payments on a credit card, it may be time to ask whether bankruptcy is a better solution for your situation than transferring the debt to another bank.