3 money strategies that can backfire

By Liz Pulliam Weston

I have some really bright readers.

They're always looking for a better deal, a clever shortcut, a new way to get what they want.

Unfortunately, sometimes they outsmart themselves.

Here are three common scenarios that look like can't-miss strategies. On the surface, these ideas appear to be real winners, and they've all got something to recommend them. But they come with hidden traps and costs that can easily leave you poorer than if you'd done things the conventional way. For example:

Using credit cards instead of a loan

If you have good credit, you generally can qualify for lower rates on a credit card than you can on a typical loan. Sites such as MSN Money, CardRatings.com and Bankrate.com are full of offers for cards with annual percentage rates as low as 4% and balance transfer offers with 0% rates. Furthermore, many cards offer rebates or other rewards.

That leads to the temptation to use a card to buy something traditionally purchased with cash or a fixed-rate loan.

It's not always a terrible idea. Credit card expert Curtis Arnold of CardRatings.com bought his family's minivan this way in 2002. He charged the $13,000 used vehicle to his Discover card to get a cash-back bonus worth about $300, then promptly transferred the balance to an MBNA card that had a "0% for 15 months" offer. At the time, the best rate he was offered on a used-car loan was 5.5%.

Arnold paid off most of the debt on the MBNA card before the 0% rate expired, then transferred the remainder to another card using another low-rate balance transfer offer.

But Arnold, the author of "How You Can Profit From Credit Cards," would be the first to tell you that you have to proceed carefully.

"(It's) best to proceed with caution," he said, "and have a backup plan."

Among the many traps you need to watch out for:

Your rate isn't fixed. There's no such thing as a true fixed rate in the credit card world. Your issuer can raise your card's rate on a whim (read "The credit card party is officially over" for more). Credit card companies are somewhat better about honoring the rates and terms of balance transfer offers, but it's still easy to lose: Pay late even once, and you often have to kiss your great rate goodbye.

You may not get the deal you think. Balance transfer fees can add significantly to your overall costs. The typical fee these days runs 3% to 4%, and many are no longer capped. Instead of paying a maximum of $50 to $75 to transfer a balance, there may be no ceiling, so a $10,000 balance transfer could cost you $400. That can significantly reduce the advantages of a lower rate. Arnold, who did his deal back in the days when many low-rate transfer offers waived their fees, said these days he'd look for an offer that capped the fee at $100 or less.

You could wind up paying more. Installment loans require that you pay down your debt over time. With credit cards, you can wind up bouncing your balance from low-rate card to low-rate card, making little progress on reducing your balance. In the long run, you could end up paying more interest. Also, you typically have to be careful not to make new charges on a card to which you've transferred a balance. Those new charges will typically rack up double-digit interest rates, while your payments will go toward only your low-rate balance.

You could ding your credit scores. The FICO credit scoring formula, the one used by most lenders, is quite sensitive to how much of your available credit card limits you're using. The more of your limit you use, the bigger the potential damage to your score. Max out a single card -- by using 80% or more of your available credit -- and you could knock 30 points or more off your scores. Having a big balance on an installment loan, such as an auto loan or mortgage, doesn't have the same effect. You get points for paying down an installment loan, but you don't suffer for having a big balance.

You have to pay attention. You not only have to scour the fine print and do some math, but you have to pay close attention to exactly when any teaser or balance transfer rates end. Don't just note the month; call the issuer and ask which day the low rate expires. You'll have to make sure to have the debt paid off or have another balance transfer lined up at least a month in advance, and there's no guarantee the rates and terms will be as good.

"Given the state of the economy and the fact that the card industry is likely to be more regulated in the not-so-distant future," Arnold noted, "teaser rate offers in general may become harder to find 12 months from now."

Bottom line: If you're a detail-oriented person who's diligent about researching and comparing offers, you could come out ahead. But I'd be sure to have a fat emergency fund or an alternate source of credit, such as a home-equity loan, that you can use to pay off your credit card balance if the deal goes sour.

Continued: Borrowing from your 401(k)

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