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.