The Credit Card Balance Transfer

Many credit card users are taking advantage of the opportunity to save money on interest fees with a credit card balance transfer.

A balance transfer can be made from one or more credit cards, transferring the debt to a new card with better interest rates, often as low as 0%. The low or no-interest promotional period typically lasts for six months to a year with most card issuers; at the end of the promotional period, the card will begin to carry it’s normal APR. It’s pretty easy for someone with good credit to find a credit card for a balance transfer; offers may come weekly in the mail for a low-interest balance transfer. Credit card users may also check with their current card issuers to see if there is a balance transfer offer available to them.

With so many credit cards choices out there, it can be confusing when trying to decipher the information. It’s important to read and understand all the terms and conditions of any credit card that you may be considering. Not all credit cards are created equally; some issuers may charge higher fees and rates for late payments and going over your credit limit. Some will have a longer promotional period, and some APRs will go much higher than others do when the introductory period ends. The most enticing part of the credit offer will always be in eye-catching bold letters on the front page, but to get the rest of the story, you’ll have to read the small print, often at the end or on the back page. This is where you can find information, such as annual fees, transaction fees, interest rates for various charges, grace periods, and default rates.

Credit card issuers aren’t giving you this “freebie” to win your loyalty; they want your money.

If you’re considering a balance transfer, it’s good to understand the credit card issuer’s perspective, and how they will make money on an interest-free loan. The average consumer who has credit card debt is often relieved to find a balance transfer deal that can save them money. But the credit card issuer is not really in a business position to make your savings a priority. So why do they offer such a great deal to the consumer? How do they make any money when they loan you money for free? It works the same way as with any other investment. An investor is willing to take an initial loss in order to earn future gains. The credit card companies do the same thing; they invest in the credit card user’s current debt, hoping for future returns.

Some credit card issuers may even begin to see a return on their investment immediately, starting with a balance transfer fee. Be aware that many, but not all, card issuers charge a balance transfer fee of about 3%. Some issuers have a dollar-amount cap on this fee, that may range from fifty to three hundred dollars, but other issuers have no cap. If there’s no cap on this fee, it can take a big bite from your actual interest savings. Take this fee into consideration when you calculate your actual interest savings; a card with a 0% introductory offer and a 3% transfer fee, with no cap, will still cost you 3% of the debt, not the 0% they advertise in bold print. The transfer fee, if there is one, is usually assessed immediately once the transfer process begins. This important information can be found in the fine print of the credit offer.

Also, understand that those super-low rates advertised will be the best terms available to consumers with the best credit. Receiving an offer for a 0% balance transfer doesn’t guarantee that you’ll qualify for it; pre-screened is very different from pre-approved. Credit card issuers may send you an offer because you’re on their list of people who meet certain criteria, but they don’t pull a full credit report until you actually apply for the credit card. When they see your report, they may not give you the same terms as in the offer if you don’t fulfill their expectations of someone with excellent credit. They may still approve you for a balance transfer, but the terms will be adjusted according to your credit history. Someone who doesn’t have perfect credit may end up transferring balances to a card that actually saves them little. Know what your actual balance transfer interest rate will be before you request a balance transfer.

It’s important to know if the introductory rate will apply to new purchases, in addition to your balance transfers. Look in the fine print for this one, too. It’s common for the introductory rate to only apply to balance transfers, with the normal, higher APR being applied to new purchases. If there are different interest rates being applied for different types of charges, most card issuers will apply all payments to the lower interest debts before they apply them to the higher interest debt. Let’s say you transfer a balance for the 0% introductory period, but new purchases will be charged the standard 17% APR. If you use your new card for anything else, those purchases will rack up interest fees at the higher rate while you’re trying to pay off the balance transfer amount. If that’s how your new card works, avoid using your card at all until the transferred amount has been paid off.

Stay on top of your payments if you transfer a balance to save interest charges. Credit card issuers may let you get away with an interest-free loan as long as you abide by their rules. But, one late payment or a dollar over your credit limit can virtually guarantee that the card’s default rates will take effect, which is as high as about 28% with many issuers. They have to make up for their generosity somewhere, and this is where they can make big bucks. One simple mistake can cost you a lot of money, and bury you into more debt than you were trying to pay off to begin with. Think about it, at the rates they’re charging, $10,000 worth of credit card debt can cost $2800 in interest per year! Keep track of your balance and available credit, and make sure you pay your monthly bill in plenty of time to avoid those punishing default rates.

Credit card issuers biggest payout comes when the card user fails to pay off the credit card balance before the promotional period ends. This is what they’re banking on. Consumers often aren’t in a hurry to pay off a 0% interest debt. Some who transfer credit card balances will focus on paying down low-interest car loans, personal loans, even mortgages, thinking they’ll save more that way. Before they’ve had a chance to make a real dent in the credit card debt, the intro period is over. They are left with a huge credit card balance that costs way more in interest than any of their other loans. To top it all off, the credit card user may have run up new charges during that time, and the balance is even bigger than they started with. Card issuers will make up for the “free” loan with the new interest rate, which may be anything but competitive.

How long does it take a typical person to run up $10,000 in credit card debt? Six months? A year? I certainly hope not! The average person takes years to gradually accumulate that kind of credit card debt; vacations, car repairs, medical care, and life’s little luxuries all add up over a long period of time. When the credit card user finally realizes that they bit off more than they could chew, they hope to save money with a credit card balance transfer. What they may not realize is that the credit card issuer is a very savvy business entity. Why should the credit card issuer wait for many years to collect interest on $10,000, when they could “buy” such a large account with as little as six to twelve months of free interest? Now, that’s where their investment begins to really pay off. That’s why the credit card balance transfer is not only popular with consumers, but also profitable for the credit card company.

A balance transfer can save you money, but you must have a plan and stick to it.

If you want to save interest charges and pay off your credit card debt, a balance transfer can buy you some interest-free time, but you have to have to take advantage of it while it’s still interest-free. I know, it may feel like you’re giving away something for nothing by making large payments during the 0% interest period; we’re just not used to getting a loan for free. We might feel like we should milk it for all it’s worth, by using the money for other things until the bitter end. The sad truth is, many consumers who need to transfer balances are the ones who will be less successful at paying them off before the intro period is over. Having a realistic debt repayment plan is vital to coming out ahead in the balance transfer game. It will not benefit you to transfer thousands of dollars in credit card debt and only pay the minimum payment until the APR sharply spikes. Paying off a credit card with the minimum payments can take as long as it does to pay off a mortgage, and that’s if you never charge another thing again! Please take advantage of the 0% promotional period by paying as much as you can each month during that time.

Then there’s the question of what to do with your other credit cards once you’ve transferred your balances. Do you keep them or close the accounts? It depends on several factors, some involving the cards in question, and some depending entirely on you. You may have chosen your new card for the 0% introductory period, but that rate isn’t permanent. What will the APR of the new card become, compared to your other credit cards? It’s probably a good idea to hang on to a card that has otherwise great rates and no annual fee. How long have you had your other cards? Closing long-term accounts can hurt your credit score, especially if you don’t have a long credit history. More damage can be done to your credit score when you close other accounts, since it will increase your credit-utilization ratio. Credit-utilization ratio is how high your balances are, compared to your credit limits. It’s best for your credit score for your total balances to be less than 30% of your total credit limits.

On the other hand, whether to keep your other credit cards also depends on you. Are you committed to using the balance transfer’s promotional period to pay off your credit card debt? Some shoppers can’t resist the temptation of a zero balance on their credit card. The worst scenario happens when a credit card user transfers their balances to a new card, and then runs up the other cards once they have all that available credit at their disposal. This leads to double the amount of debt that the consumer planned on paying off! Nobody wants to admit that they use their credit cards for more than they should, but now is the time for a reality check. Closing your old accounts may be the wiser choice if overspending is what led you to need a balance transfer to begin with.

Some credit card users continually move their debt from credit card to credit card, chasing those introductory offers. When one card’s intro period ends, they transfer to a new card with another promotional offer, further delaying their credit card interest payments. This can work for those who are committed to paying off their debt in a timely manner. It can also backfire, if the card user runs up new debt with every balance transfer. Also, credit card issuers may see a habit of overusing balance transfers, and might stop offering the introductory rates to those that they know they’ll never make any real money from. It may be a money-maker for them with the general population, but they may not want to offer it to an individual who has apparently tried to beat their system.

Overall, the balance transfer is a great way for a consumer to save on interest charges. The 0% balance transfer lets you put all your credit card payments into paying off the balance, without those pesky interest fees taking a chunk of your money. But that promotional period has a time limit, and it’s best to pay as much as you can, as fast as you can, before that time runs out. The balance transfer is a temporary solution to get ahead of your credit card debt. Be very cautious about trying to use it as a permanent trick to get out of paying interest fees to the credit card companies; you never know when the 0% interest offers will stop coming.