Credit & Debt


How To Cheat on Your Lender

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By Dayana Yochim (TMF School)
January 12, 2005

Are your eyes wandering? Got commitment issues? Who can blame you -- at least when it comes to pledging allegiance to a single lender? No enticement is too out of bounds if it will get you to abandon that alma-mater-emblazoned Visa card for their shinier, newer model. (Hey, we're guilty, too -- though we think The Motley Fool Visa has a lot of other lovely qualities deep inside.)

The most popular lure is the single-digit interest rate. Frankly, if you're currently carrying debt, we think it's an enticement worth considering. By transferring a balance from a higher-interest rate loan to a low-interest rate card, you can effectively shave hundreds -- or thousands -- of dollars from your loan.

But before you play the field, read the fine print:

What does the offer apply to? Balance transfers? New purchases? If you plan to use the card to move an existing balance over, make sure the balance you transfer falls within the credit limits of the new card.

Check how long the low rate lasts. The best offers are ones where the low rate applies for the life of the transferred balance. But those are rare. So look for one that lasts for a reasonable period of time (six months is a good starting point). After that, the sky's the limit, so either pay off your balance quickly or have a new low-rate card ready to accept your balance transfer.

Make sure you qualify. The best place to start looking for a better deal is in your wallet. Start with your current lender and negotiate for a lower interest rate. If you don't get one that is satisfactory, shop around. Lenders are tightening their requirements for the best deals. Still, competition is fierce.

Be diligent about paying your bill on time. Make minimum payments (hopefully more than the minimum amount due) on time, or else you can pretty much kiss that low rate goodbye. Lenders are always looking for a way to eke out more money from you -- whether through interest or late/penalty fees. Late payments are just one event that'll give them a reason to hike up that interest rate.

Be diligent about paying other bills on time. Beware of the dastardly "universal default clause." It's a legalese way of saying, "If you're late making a payment to another lender, we can hike the interest rate you pay for our card." In other words, watch your back -- because everyone else is just waiting for you to mess up.

Avoid putting new charges on the card. Most of the time new purchases are subject to a higher interest rate. Plus, they will be the last charges your payments will be applied to. That means that if you take your time paying off the $10,000, but have put another few grand on the card at 14% interest, your payments won't touch the new charges until the old, lower-rate ones have been paid down. You don't want to be accruing interest on those new charges for any length of time.

Beware of canceling credit cards: If you plan to move any remaining balance over to a new credit card once the special rate expires, make sure you line up the new line of credit ASAP. But also consider the affect new credit (and canceling old cards) will have on your overall credit score. Sometimes closing an old account can hurt your FICO score.

Check out the Credit Center for more tips on managing your credit.