Credit Card Hopping Injures Your Finances

You've probably heard the saying, "The big print giveth and the little print taketh away." This usually is the case with credit card low introductory interest rates, often called "teaser" rates. It's important to read the fine print at the bottom of such offers.

The biggest surprise for most consumers is that these low introductory rates, often offered by the larger, national card issuers, won't last forever--most last about six months. After that, the rates skyrocket to sometimes double or even triple the introductory rate. And there's more: As USA Today reported, "These cut-rate [credit] cards come with more trap doors than a haunted house."

Watch your step

Many low-rate credit card offers are trapped with hidden fees and escalating interest, according to the U.S. Public Interest Research Group, in Washington, D.C. Some of these hidden fees include:

Balance transfer fees of up to 3% or more. If you transfer $1,000 with a 4% fee, for example, you're paying a hefty $40 up front. Most issuers charge these fees as soon as a balance is transferred onto a card. Also, some card issuers' low-rate interest deals only apply to new purchases and not to balance transfers. "Figure out how much you're actually paying to transfer the money and compare that to what you're saving on interest--it's not always worth it," says Sheila Fothergill, certified consumer credit counselor in Madison, Wis. Balance transfers can be tricky, so be sure to read the fine print carefully and call the issuer for explanations if necessary.

Pay late once and you could pay a fee of anywhere from $15 to $35 and dramatically increase your interest rate to double or even triple the original introductory rate. For example, one card company offers a 1.9% teaser rate that shoots above 25% if you pay late or exceed the credit limit once. That's in addition to penalty fees.

"I've actually heard of credit card companies that will reduce your credit limit to below your current balance if you make too many late payments. You could be $500 below your limit, but then the creditor reduces your credit line--because you're a poor credit risk for paying late--and suddenly you're $500 over the limit. You will then be charged a monthly over-limit fee until you reduce your balance," Fothergill says.

Many low-rate offers have shorter grace periods and some come with annual fees.

Not everyone qualifies for the low-rate offers. If you have a less-than-perfect credit history you may qualify for a much higher rate vs. a 1.9% rate--it's up to the card issuer to decide. "Just because you get something in the mail that says you're prequalified for a certain rate does not mean that they'll actually approve you," Fothergill says.

You also can lose your favorable rate if your credit card issuer discovers you've made late payments on other debts. Most issuers monitor credit reports.

Keep both feet on the ground

Financial counselors advise against teaser-hopping--repeatedly transferring your debt from one credit card into another new card with a low introductory rate. Why? Because it can hurt your credit rating. Credit inquiries and credit denials show up on credit reports. A new card every few months could make you look fickle or irresponsible to lenders down the road. This can make it harder to get other types of credit, such as a mortgage or a car loan.

These low introductory rates won't last forever--most last about six months.

Also, you could be denied an application for a low-rate card because your credit record tags you as a rate hopper. It's always better to have a history of loyalty--creditors want to see that, according to Steve Rhode, president and co-founder of Myvesta.org, a financial counseling center in Rockville, Md.

"Another downside of using teaser-rate hopping as a strategy to paying off your debt is getting overly focused on finding a low interest rate rather than focusing on increasing monthly payments," says Fothergill. "If you switch to a lower-rate credit card but pay less each month, it's not necessarily going to help you in the long run pay off your credit card debt."

Preventing injury

Instead of switching from one low-rate credit card to another, stick with a credit union credit card. The interest rate on credit union credit cards averages three percentage points lower than the rate on cards issued by banks, according to Greg McBride, a financial analyst for Bankrate.com. Dependable low rates have set credit union credit cards apart for years.

Not only is it better to choose a credit union credit card because of the cost savings, but teaser rates offered by other card issuers are slowly disappearing. More card issuers are beginning to offer single-rate cards instead.

It takes more than a Band-Aid

If you're considering switching to a teaser-rate credit card in order to free up some cash, there are better alternatives. The best way to free up cash is to eliminate credit card debt. Make more than the minimum payment a month and either increase the payment amount or increase the frequency of payments, if possible.

The best way to free up more cash is to eliminate credit card debt.

"If you want to pay off your credit cards, you have to stop using them," recommends Fothergill. Especially if you carry a balance from month to month. "You have to realize that if you have a [credit] card that has your Internet service automatically charged to it that you are being charged interest on it from the moment it gets put on your card."

A next step is to re-evaluate your spending habits to avoid running up a huge credit card balance in the future. Try to limit credit card charges to emergencies and to purchases you can pay off in 90 days. Create a budget, if you haven't already, and stick to it--live within your means.

Published June 10, 2002