Credit Card Balance Transfers: Pros, Cons and Personal Budget Management
Balance Transfer… What it offers
Most people with credit cards know the term balance transfer. They may have even been enticed by an offer in the mail. To those with an enormous amount of debt, it may seem counterintuitive to get another credit card. But in the slowing economy, balance transfers can lower monthly expenses and play an important role in personal budget management.
A balance transfer literally transfers the balance from one credit card to another one with better terms and low or zero interest rates. It can assuage post-holiday-spending hangovers, help you make large purchases, combat high interest rates (especially on rewards cards), or relieve you when intro rates on current cards expire.
It can be a smart way to buy time-for a limited period of usually 6 to 12 months-where you can avoid finance charges and make payments to the principal balance.
Why it’s offered
It’s in the interest of credit card companies to offer balance transfer deals. They want to lure new customers with good credit who’ll stay for at least four years. They also want to keep pace with the increasingly competitive credit industry. They do this by offering teaser rates (0% or low intro rates for the balance transfer for a limited time) and low fixed rates (for the life of the transferred balance).
However, given that most people won’t pay off their balances before intro rates expire, they stand to make money from interest. They also charge different (higher) rates for new purchases made on the card with no grace period.
Who qualifies
For a new credit card and ideal intro rates, you need good credit. Just applying for the offer doesn’t guarantee you’ll lock in intro rates, especially if your credit is bad. If it is, and they still grant you a card, you’ll have higher interest rates and it won’t be worth it. For tips on repairing and building credit read Building Credit While You’re Young.
The Transfer
After you’ve applied for a Balance Transfer card and received it in the mail, read the cardmember agreement that comes with it. If you’ve qualified for the 0% balance transfer rate, call your new card issuer to request the transfer. Some issuers will mail you convenience checks — just make sure they are for balance transfers not cash advances. Continue making minimum payments on your old card since it can take four weeks for the transfer to complete.
What to watch out for
Hidden Fees: Most charge a transfer fee, usually 3% of the transfer amount. Aim for one that caps the amount at $50 to $75, or else a large balance transfer could cost a few hundred dollars. Avoid cards that charge a membership or annual fee.
Transfer rates versus purchase rates: Some offer 0% APR on balance transfers but not new purchases. Right now, a number of banks are offering 0% APR on new purchases as well, so make sure you’re getting the best deal possible.
Tricky payments: Payments are often applied to the transferred balance first because it has lower rates. The balance transfer must be paid before payments are applied to new purchases. For example, if you transfer $5,000 and then charge $50, all payments will go towards the $5,000 until it’s paid. Meanwhile, the $50 accumulates interest because most balance transfer cards don’t offer grace periods for new purchases.
Ways to save
Shop around: Compare the fees, APRs and payment policies of several cards. And be realistic about how quickly you’ll be paying down your debt. If you won’t have the balance paid before intro rates expire, find a card with the best overall rates and fees.
Right now, Mint.com likes these two offerings. They both offer 0% APR on Balance Transfers and 0% APR on new Purchases for 12 months, and with no Annual Fee.
Transfer and save. Here are two credit cards with 0% APR for 12 months.
- Chase Platinum Visa Card
- 3% Balance Transfer Fee, capped at $75.
- Sign Up
- Citi Platinum Select MasterCard
- 3% Balance Transfer Fee. Low APR after 12 months.
- Sign Up
Pay more than minimum: Pay the principal balance before intro rates expire so you won’t have to pay interest. If you can’t pay down the full balance, at least pay more than the minimum. Once the standard rates kicks in, just making minimum payments extends the debt’s life for years.
Personal Budget Management: Always make (at least) the minimum payment and pay on time. If you miss payments, you’ll end up with unreasonably high rates and late fees. Set up automatic bill pay if you’re forgetful.
Maintain clean credit: Some credit card companies routinely check your credit reports and raise interest rates if your profile changes for the worse. Make sure you keep a clean credit history.
Think long term: Don’t think that serial balance transfers are a way to avoid paying off your debt. Sooner or later you’ll have to pay it off. Consider them a potentially smart, near-term way to reduce the cost of carrying the debt you have and help you get back into the black sooner.
Remember that Mint.com can show you a list of credit cards that could save you money every time you log into mint.com. Not signed up yet? Sign up Now. Mint.com is free and fast. In a couple of minutes you’ll know if and exactly how much you could save via a lower interest credit card.
What’s your experience been with balance transfers? Have you found Ways to Save via Mint.com?
[...] up on your credit card but still aren’t convinced that a transfer balance is right for you, their post is definitely worth the read. Some stand-out points include their list of what to watch out for: [...]
Isnt there another hidden fee with balance transfers? I was told that there is the interest rate where they offer you a lower rate until (for instance) jan 2009 and then there is a finance charge that they will charge monthly and that charge can be from 1% on up.With my credit cards, I have rates on some cards that are 1% and others that are 3%.When I looked at my monthly payments, it made sense to stay with the card that had a higher interest rate but a lower finance charge.When I finished my calculation my monthly was lower. Can you explain what this is?
Thank You!
Great post, Angela! This is a must read.
khia: Unfortunately I’m not too sure what hidden fee you’re talking about. General balance transfer offers terms are laid out above by Angela, although some credit cards companies do send out rare but specific balance transfer offers for some of their card holders.
If you can clarify the rates you’re talking about on your statement, perhaps I can help answer the question you have.
Ditto on the great post Angela!
To add, for others curious on balance transfers, don’t forget that balance transfers do not have grace period associated with them. What this means is that the minute you initiate the balance transfer (or the day its posted on your account), the interest starts accumulating immediately. This of course is a non-issue when you use 0% balance transfer offers with no fees.
Balance transfers work if you do them right and continually work on paying down your bills. Using balance transfers over and over as a way not to pay your bills is a long road to nowhere.
Just make sure you are paying more than the minimum and not charging any more than you absolutely must.
Better watch for those statement “Closing dates”. I noticed on some of my credit cards that if I made the online payment prior to the closing date, I often had to make two payments for one month. Why? Because I make my payments on the 1st to 3rd of each month (this is when my finances are posted at my credit union) and sometimes my February payment was posted as Januarys. I was able to get the late fees taken off but then noticed that I had finance/interest charges on the credit cards. Bank of America is especially bad about this. Then when I explain why I need payment dates moved forward, they tell me to remember my statement closing date and make sure my payment is sent/posted after that date. It is really confusing.
A few more tips on this:
1) One thing that would be key to making balance transfers a good idea is to make any NEW charges to a different credit card that you pay off in full every month. Because of the credit card companies’ policy to accumulate interest on all new charges until the balance that is locked in at the low rate is paid off, you could end up accumulating quite a lot of interest, depending on how long you sat on the balance. If you just sit on the balance and chip away at it, though, it can be a really good deal.
2) Along the same lines, I have been playing a fun game with Bank of America. I have a B of A card with a very high credit limit ($25,000) that I NEVER use. Recently, they sent me a new card to replace the one that was expiring. When I called to activate it, they offered me a balance transfer / cash advance deal (I could either do a balance transfer or take a cash advance) for whatever amount I wanted. So I had them transfer $20,000 directly to my bank account, where it is sitting and earning 4.5% interest. I paid $90, but I’m making an extra $80 or so each month. In the meantime, I continue to not use my card, pay the minimum amount each month (which gets applied to the principal) and just before the promotional period expires in May, I will pay them back in full. So I should net about $400 from the deal. I’m hoping they will offer me a similar deal immediately thereafter!
That’s called “stoozing” and you should know that it murders your credit score.