Here they come – Credit card companies are willing to give you 18 and 21 months of no interest to open up a new credit card and initiate a balance transfer. Be careful whenever a credit card company is willing to give you a good deal. They don’t have your best interest in mind. They only have money on their mind and how much they can make.
Let’s unpack the problem – first, my disclaimer – This is a hunch on my part. Even if I am wrong, should a credit card company make it easy for someone to get an interest rate of 29% on a balance transfer? There is also one other thing worth mentioning: Technically, the 21-month free interest period is not technically free. They charge 5% for transferring the money over. Just like interest, transfer fees are a cost.
Here is how it works. Once the free interest rate program is over, they assess your credit and give you an interest rate of 17.99% to 29.99%. For the best credit score in the 800’s, the best rate you can get is 17.99%. Here is what most people do not know. FICO, who is responsible for most consumer credit scores, has come out with a new credit scoring system. The current scoring system does not give much weight to increasing balances over time as long as you pay on time each month. With this new system, your credit score will get lowered if your balances are on an upward trend. This explains why, due to the current FICO scoring system, a consumer can still have a lot of debt and not have as big a negative effect on the credit score.
Going forward, there is a high likelihood your score could go down 20 or so points due to increasing balances over the past year. If the overall trend is a decrease in credit scoring, Wells Fargo can give out higher interest or penalty rates based on FICO scoring. So, the credit card company could easily give you as high as a 29.99% interest rate on your balance transfer. This will take a while for FICO to implement. However, 18 to 21 months should do the trick.
Suppose a credit card company thought the ability to charge higher interest rates was in the near future. Wouldn’t the credit card company entice consumers with 21 months of interest-free credit in order to capture as much of the business as possible? The credit card company could easily justify the higher interest rates because the new FICO 10 scored the credit. Also, you may be unable to move that higher interest rate debt to another lower rate card because of the lower credit score.
So, make sure you think twice before jumping into these offers.
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