CC BALANCE TRANSFERS

Transferring debt using low-rate balance transfer offers provided by credit card companies is commonplace. As with any financial decision, there are pros and cons to consider in this matter. I don’t want to focus on weighing the merits of balance transfers. Rather, I want to address what you should look [look out] for if you’re considering this strategy as a method to get out of debt more quickly …

CONSIDERATIONS:

Look past the 0% offers. This may sound counterintuitive, but the best offers [for long-term transfers] typically are not at 0%. The 0% offers that come in abundance are typically for 6-12 months with a 16% or 18% rate to follow. Knowing the duration is normally limited, is it any surprise to hear that 86% of offers between January 2005 and September 2006 were 0% offers? Obviously this is a problem if the balance isn’t paid off by then. Most “fixed for life” transfer offers are in the 2.9% to 5.9% range. 0% fixed for life offers are out there, but are few and far between; 7.5% of the 0% offers, many of which have other catches, keep reading ...

Look at the costs. In the “good old days” finding a 0% no fee balance transfer was a piece of cake. Those days are long gone. No fee transfers are nearly extinct – in addition, many companies that traditionally charged a fee (commonly a 3% fee with a $50 or $75 maximum) have removed the maximum so that if you’re transferring $10,000 – that 3% fee would tack on $300 to the transaction (in other words, a year worth of interest in the no fee/2.9% offer).

Look at the facts. It should come as no surprise that these types of offers are marketing ploys to play with our human psychology. Obviously the company is making money or they wouldn’t do it. Smart Money has a tool on their website that will enable you to plug in the numbers related to the balance transfer to determine what it will really cost.

Talk to your current creditor. Before diving into the murky water, a suggested first step is to call your current creditor [with the offer you’re considering in hand] and ask for something comparable. Obviously they want to keep your business. This will also be much better for your credit than continually opening new accounts to ‘hop’ between.

Use only for transfer. If you decide to transfer a balance, make sure you don’t use the card for anything else (i.e., everyday purchases). According to Mintel Comperemedia (a company that monitors direct-mail solicitations), nearly ½ of balance transfer offers also include promotional rates for new purchases. Enticing? Keep in mind that any payment you make on the card will go to the smaller interest rate and the promotional rate will eventually go up. Some companies will require a certain number of purchases (often 2 or more) or a minimum dollar amount of monthly purchases (often $35+) in order to receive the special balance rate. Be cautious!

Beware the bait and switch. Beware the offers for rates “as low as” … essentially that means that if you have excellent credit we will offer you X, but if you don’t, you’ll get a much less desirable Y. Some suggest responding to transfer offers over the phone so that you can cancel the application if the terms don’t meet your liking.

Universal default. You don’t have to read far to see that doing balance transfers isn’t for the faint of heart – it’s also not for the individual that has a tendency to miss payments. Many creditors employ a ‘universal default’ strategy, meaning that a missed payment to any creditor (doesn’t have to be the card with the deal) will immediately result in the interest rate being set to the default rate – some companies will jump the rate to 30% for a single infraction … ouch!

Make sure you look before you leap. Review the Financial Tip archive as well as the credit card section of the OFS website to aid in learning about other credit card-related issues …

HIGH YIELD SAVINGS ACCOUNTS

As people become more technologically savvy, more and more financial products are being offered online. There have been many resulting benefits: faster processing times, broader access to financial products, convenience, and cost (often competitive interest rates and lower fees than traditional brick-and-mortar financial institutions). If you haven’t yet taken the “e-banking” plunge, perhaps you should consider.

The Federal Reserve Bank of New York provides useful instruction regarding online banking. A brochure on “Tips for Safe Banking Over the Internet” is also provided to benefit consumers.

While the Internet offers the potential for safe, convenient ways to conduct business 24/7, safe online banking involves making good choices to avoid costly mistakes and scams. Is XYZ bank legitimate? Are my deposits insured? Is my personal information private/secured? What are my rights? All of these questions are addressed in the Tips for Safe Banking, free New York Fed brochure.

Where to begin looking.
If you’re trying to find the best rates for savings accounts, CDs, and other financial products, a great place to start is the Bankrate website. Bankrate offers information that is free, objective, and as comprehensive as any site I’m familiar with. A couple of other resources I’ve come across recently are Banking My Way, and a blog that is dedicated to these issues.

Several online banks are currently paying 5%+ on FDIC insured savings accounts – some of the prominent ones [which have no minimums to open the account and have no fees]:

- Amboy Direct
- AmTrust Direct
- Capital One
- Emigrant Direct
- E-Trade
- First National Bank of Omaha
- Flushing Savings Bank
- HSBC Direct
- Savings Square
- UFB Direct
- Univest Direct

- ING Direct, the pioneer of online banking, currently offers a rate of 4.5% on savings – they also offer a high yield checking account (4%). They have a promo offering $25 to individuals opening a savings account – you can e-mail me if you want promo code info …

THE ROAD TO ELIMINATING DEBT

* For individuals that will graduate this summer or graduated this past May, see note below on potential law changes that may have a dramatic impact on your loan repayment.


It seems like everything in the news these days is debt-related – housing concerns, sub-prime loans, unethical student loan practices, predatory lending, credit card issues, credit problems – more so than ever, we’ve become a society that is driven by debt. On the other end of the spectrum, it seems that more and more individuals are fighting this trend and have started down the road to reducing personal debt.

University of Nebraska-Lincoln Extension has created a nice resource to assist people in this journey. Their website identifies 10 ‘road signs’ to follow while walking down the path to “debt freedom” …

1. Don’t wait to act. It’s no secret that getting started is the hardest part of everything! The sooner you begin, the sooner you’ll arrive.
   
2. Stop using credit. The recommendation offered is to cut up cards and stop using them altogether. This may be advisable for some. Regardless, this plan should have you keep from taking on new debt. Avoid taking one step forward and two back.
   
3. Make getting out of debt a family affair. Differing attitudes/values about money are a large potential source of conflict – communicating about your plan will enhance its likelihood of success. If you’re single? Talk with your family; talk with roommates and others that can offer support.
   
4. Organize financial records. A workable budget is critical. I talked about several different resources in a recent blog; UNL also talks about common budgeting methods.
   
5. Learn about your debt. Winning financially requires that you have an understanding of financial concepts. Do you know what your interest rate is? What does APR mean? What is a grace period? …
   
6. Create a written debt plan. Who should I pay first? Am I in a position to negotiate lower rates? UNL provides links to worksheets and other information to assist in one’s plan development. You may remember my blog that addressed different perspectives for developing a debt reduction plan.
   
7. Find ways to cut expenses. All of us spend money on things we don’t need. 66 ways to save money is a popular resource for considering ways to cut expenses.
   
8. Find ways to increase income. Obviously finding additional resources is a great way to get out of debt sooner. 2nd job? Seek a raise? …
   
9. Make sacrifices. I’ve always liked the sentiment commonly shared with students: ‘You can live like a student now and a professional later or you can live like a professional now and live like a student later’ … anything worthwhile will require sacrifice.
   
10. Once you get there, stay there and begin a savings plan. Once you arrive, staying out of debt is one part of the challenge; the other is to begin saving and investing money to continue moving forward. Mutual fund companies like T. Rowe Price, TIAA-CREF, Ariel Funds, and Homestead Funds are all examples of institutions that cater to beginning investors [by waiving a large required initial investment for individuals willing to make monthly automatic investments ($50 in most cases)].

* This past month while I was on vacation, the government was busy talking about changing existing student loan legislation. I’m not going to take the time now to outline all of the potential changes for you because changes have yet to occur. You can view the pending legislation at NASFAA, the professional organization for financial aid administrators. Many of the changes seem smart (increasing funds in Pell Grant program, increasing transparency in the private loan industry, etc.). As is usually the case, some of the changes leave you scratching your head …

There is one potential change that would dramatically impact individuals that have yet to begin repayment on their student loans; individuals that graduated this summer and past May have the opportunity to get around the possible roadblock by taking action (this change WOULD NOT impact individuals that are currently in repayment on their student loans). Without going into unnecessary detail, one of the proposed law changes would severely cut the subsidies [money provided by the government] that are given to lenders. In many cases, these subsidies are passed along to students in the form of borrower benefits (the rate reductions given for automatic and on-time payments). In conversation with lenders, it is clear that if this law is passed [which seems likely based on its overwhelming support by the Senate], borrower benefit packages as we currently know them will be dramatically altered. It will likely push many of the smaller players out of business. It would also change things based on the date the loan is disbursed … this is a critical distinction because typically, things related to student loans are based upon the date of signature (for example, in the past, if you signed a consolidation application before July 1st, you received the pre-July 1 interest rate). With this change, it would impact the date the loan is disbursed (i.e., for those who graduated in May and are planning to keep their grace period until November, November X will be the disbursement date and if the law is passed before then, you will not receive the borrower benefits that you anticipated getting when you signed up for them in May)! If the law is passed, it will take effect [as currently drafted] on October 1 which means if you have not consolidated, you will want to consider consolidating immediately as the process normally takes 4-6 weeks. By having the loan disbursed prior to October 1st, you will lose a bit of your grace period, but it seems like a small price to pay in order to maintain your borrower benefits. If you still don’t have a job and can’t afford to begin repayment, don’t worry – after the consolidation is completed, if you are unemployed, you will still be eligible to defer your loan payment until you find a job.

If you’ve got a ‘good’ lender, they’ve likely already contacted you about these potential impacts to your situation. Hopefully they have – if they haven’t, you should contact them and talk to them more about this potential change and how it could affect you. If you have questions about this or other financial issues, visit our website (http://financialsuccess.missouri.edu) to schedule an appointment to visit with a financial counselor or planner.

Dr. Oleson