Balance Transfer Credit Card Offers – What to Watch Out For

Zero percent balance transfers

Low interest or zero interest balance transfers are one of the biggest hooks that credit card companies use to snag new customers. You’re carrying a large credit card balance and getting pummeled by high interest rates. You get an offer in the mail: transfer your balance, 0% APR for the first 12 months! Of course you go for it.

Other hooks that the credit card companies use to get you to switch include rewards, loyalty points and cash back. But balance transfers are are definitely one of the most common. The approval process is often very rapid and is sometimes even automated.

It’s a good deal for everyone, except of course for the credit card company that losing your business.

However… credit card balance transfers are not as painless as they used to be before the recession. Nowadays the credit card companies often impose strict conditions.

“Balance transfers are harder and more expensive than ever,” says Jim Randel, author of “The Skinny on Credit Cards.” “This is all part of the pullback in the credit card industry.”

If you’re considering a balance transfer deal, here are some things to keep in mind:

1. Avoid new charges – The balance transfer offer will only help you control your debt if you stop racking up new charges. Any payment you make will be applied first to lowest-rate charges. Here’s what that means:  suppose you transfer $10,000 on a zero interest for 1 year deal. However, the APR for new purchases is 15%, say, and for cash advances it’s 29%. You charge $700 in purchases to the card in the first month, and you make a payment of $500, which is well above the minimum. But here’s the thing. Not a single cent of that money will go toward the new charges. It will be applied to the balance you transferred, while the new charges will begin racking up interest rates at 15%.

So transferring your balance is only going to save you if you avoid making new charges on the new card.

2. Pay the charges down as quickly as possible. Once that teaser period runs out, the credit card company will probably hit you with high interest rates. Don’t wait for that to happen. You might think you can just find another good balance transfer deal at that time, but you never know. If you can’t get approval for a good deal, you’ll be stuck with massive interest charges.

3. Know the terms of the new card. What percentage of your monthly payments will be applied to the transferred balance, and what percentage to new charges? How long is the interest-free or low interest period? (anywhere between 6 and 15 months is typical). What will the interest rate be when the grace period runs out?

4. Make your payments on time every month, without fail. Making a late payment might invalidate the 0% teaser rate and cause an APR to be applied to the transferred balance. You don’t want that!

5. “Fixed Rate for Life of Loan” offers are an interesting twist. The credit card company offers you a fixed low rate on your transferred balance, good until you pay off the transferred amount, no matter how long it takes. So it’s not a teaser rate or introductory rate. It’s fixed. This has advantages and disadvantages:

  • Advantage: you don’t have to worry about the grace period running out. If your budget doesn’t allow you to pay off the entire transferred balance in six months or a year or whatever, you don’t have to panic. You have time.
  • Disadvantage:  there’s an interest rate applied to the transferred balance. It’s typically not a high interest rate, but it’s not zero percent either. It’s often about half or two thirds of what a bank might charge on a fixed-term personal loan. So the gift of time is really an illusion. If you take your time paying off the balance, making only small payments, those interest rates will cause the balance to grow, and you’ve made no progress.

Also be aware that “fixed rate for life” offers are usually contingent on you making the payments on time. Make a payment late, and your interest rate might get jacked up.

6. Balance transfer fees have gone up. Before the recession, balance transfer fees were usually in the 1% to 2% range, maybe as high as 3% if your credit was poor. Nowadays, 3% to 5% is more common. So transferring a large balance can be quite costly, especially if you do it serially, moving the balance from card to card. You no longer have the luxury of schlepping around a large balance in that way. Do your best to pay it off quickly. Make it a priority.

Read the fine print. Know exactly what you’re getting into. Protect yourself, because the credit card companies won’t do it for you.

14 Credit Card Tips to Save Money and Protect Yourself

Stack of credit cards

Credit cards are powerful tools, and like any tool they can help you if used correctly, and hurt you if used wrongly. Used wisely, credit cards can earn you rewards like cash back, bonuses, and airline miles. But if you don’t pay attention to the terms and services, and you make the wrong choices, you could end up with a pile of debt, and snowed in by usurous interest rates.

Here are some great credit card tips that, if followed, will ensure you never get in over your head:

Protect Your Credit Score

1. Pay off your entire balance every month. That’s the only way you can avoid pay interest charges every month. If you start accumulating a rolling balance, it can quickly spiral out of control, until you find yourself in a situation where all you can do is pay off the interest each month, and the principal does not decrease at all. That’s a terrible situation to be in, and it’s all too common. In fact the Federal Reserve estimates that 40% of American households carry credit card debt. So exercise some discipline and pay off the entire balance each month.

2. Pay on time. Making late payments can get you in trouble in other ways as well. For one thing, there is typically a late fee of $30 or more, and secondly your interest rate can go up. When you make late payments it affects your credit score, and your interest rate can be jacked up dramatically, to crazy rates approaching 30%. So make your payments on time every month!

3. Not too many cards. Limit the number of credit cards you own to between two and six. Applying for many credit cards will hurt your credit score. Closing several cards at once will also hurt your credit score, strangely enough. For the best possible credit rating, keep about two or three credit cards, and pay them off each month.

4. Know the terms and conditions. Read the fine print. Know what your interest rate is, under what conditions it goes up, on what date your bill is due each month, and what the grace period is if you’re late.

5. If you’re credit is great, negotiate. If you have an excellent credit score – 700 or above – you may be able to get a lower interest rate. And if you do make a payment late, the company might be willing to drop the late fee if it’s an isolated incident.

6. Don’t max out your card. Credit bureaus look at what percentage of your available credit you are using. If it’s too high, your score drops. So don’t go over 30% of your available credit.

Not All Credit Cards are Created Equal

7. Know the terms on balance transfers. If you’re doing a balance transfer from an old card to a new one, ask if there is a transfer charge and how much it is. Some cards have no balance transfer fee, while others charge 1% or even 2%. This can really add up if you’re transferring a large balance. Also, if it’s a zero interest or low interest transfer deal, make sure you understand what rate applies to new purchases. If it’s a zero percent transfer, that almost certainly applies only to the transfer, not to new purchases. Make sure the interest rate on new purchases is not excessively high.

8. Be careful with rewards cards. Rewards cards offer tempting incentives like airline miles, cash back, and prizes. Whoo hoo! Actually, not so much… Most rewards cards carry a higher interest rate, and often have complicated or unrealistic conditions for getting the rewards. It’s often best to stay way from these.

9. Store cards. Credit cards issued by retailers often carry a higher interest rate. Be careful with these. They can qualify you for store discounts, but opening too many of them will also lower your credit score.

“Convenience” Can Cost

10. Contactless cards are vulnerable. New “contactless” cards allow you to simply wave your credit card at a reader. You don’t have to hand it to the cashier or even swipe it through a machine. But thieves can sometimes scan or intercept your card data. And if thieves get a hold your card, they can rack up large charges with the same ease that you can. Until better security procedures are instituted with these cards, it might be best to avoid them.

11. “Convenience checks” are dangerous. You know those convenience checks that credit card companies send you in the mail along with your statement? Don’t use them. They carry an extra fee of 3% or 4%, higher interest rates, and no grace period on the payment date. They also don’t give you the same consumer protection that your credit card does. They are simply a bad idea. Trash them, but make sure to tear or shred them, as you should do with all sensitive mail.

12. Credit card protection insurance is limited. This insurance, offered by credit card companies for an extra monthly fee, actually only covers the minimum monthly payment, and only if you are disabled or unemployed. Meanwhile interest will continue to build on your unpaid principal. So this insurance is not really worth the extra fee that you pay. The only way I’d recommend it is if you carry a large balance, and stand a good chance of losing your job.

Re-establishing Credit

If you’re credit rating has been damaged, opening a new credit card account (assuming you can qualify) can be one way of re-establishing your credit worthiness. But watch out for these risks:

13. High interest rates. Cards issued to those with bad credit histories always carry higher interest rates, sometimes in the 18% to 22% range. The credit limit is usually low, often not more than $300 or $500. On top of that, there are often extra fees, such as an annual fee. Read the fine print. In the end, this is still a good way to re-establish your credit worthiness, but only if you’re sure you will pay off the balance every month.

14. Restrain yourself. If you’ve signed up for a low-limit, high interest card in order to re-establish your credit rating, companies may begin bombarding you with offers for more of the same types of cards. Don’t go for it. You could end up over your head, with a revolving balance that you can’t pay off, paying huge interest rates and plunging into debt. Stick to one low-limit, high interest card in order to rebuild your credit, and pay it off each month.