Credit Card Balance Transfers: Bankruptcy Substitute?


Balance transfers are often advertised with an offer of dramatically reduced introductory rates for borrowers who are willing to transfer their balances onto a new credit card. Additional credit cards though are rarely 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 of peoples’ financial problems by eliminating or reducing the total amount of debt.

The dangers of credit card balance transfers

The dangers presented by balance transfers are usually found in the small print. Low introductory interest rates are used to get people to transfer their balances onto one credit card, and often seem so appealing that the hidden costs and fees are hard to find or understand. The low interest rate usually lasts for only a limited amount of time. At the end of that period 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.

Frequent balance transfers can adversely affect your credit score

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.

Costs of balance transfers

The costs involved with a balance transfer can quickly cancel out any financial gain from a low introductory interest rate. Common fees include monthly finance fees, annual fees, balance transfer 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.

So, think twice before 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. We would be happy to discuss all of your options with you. Feel free to contact us at (503) 352-3690 or fill out our free evaluation form.