What is a Balance Transfer?
A balance transfer is what usually happens when we allow the balance on a high-interest rate card to creep up to the point we are forced to take on a part-time job just to pay the interest charges on the credit card.
About that time we get a balance transfer offer in the mail stating that they will allow us to transfer our higher rate balances to their card and they will charge us little or no interest for a period of 6-months to a year. Sounds good, right?
It is a good deal, but only if you cut up the cards and close the accounts you transfer the balances from. Otherwise, guess what typically happens? That's right, because you have little or no available credit on the new card, you end up charging purchases to the cards that now have plenty of available credit.
In other words, if you have not learned your lesson about carrying balances on credit cards before you make a balance transfer, you will most likely end up with two, three, or four times the amount of credit card debt as you had before the balance transfer. Why do you think credit card companies make those generous balance transfer offers?
What Are the Factors to Consider?
When considering a credit card balance transfer offer, here are some factors you need to be aware of before making your decision.
Penalty APR Supersedes Introductory Rate
If you read the fine print on the credit card offer you will likely "discover" that if you're late making just one of your payments, your "introductory rate" will permanently skyrocket to a Penalty APR of up to 29.99%! Now, if you have a working crystal ball that says you will never experience a sudden loss or drop in income, then feel free to totally disregard this warning.
Balance Transfer Fees
In most cases, you can expect to pay a 3% to 5% fee on the total of transferred balances. In other words, the 0% APR being advertised is true only if you consider the balance transfer fee to not be a sly way to charge you interest anyway. What's more, the balance transfer fee is usually added to your transferred balance, which could result in you exceeding your credit limit, and voila! You're the proud owner of a brand new Penalty APR!
Post Introductory Period Rate?
Typically the credit card company will state something like, "After that (introductory period), your APR will be 10.99% to 18.99% based on your creditworthiness and will vary with the market based on the Prime Rate."
If you think your post-introductory rate will be 10.99% after they just spent 6-months to a year collecting little or no interest from you, then the phone is for you -- it's reality calling.
No Rewards or Grace Periods
In the fine print of most offers, you will "discover" that transferred balances do not earn rewards and there is no grace period for avoiding interest charges.
Friend or Foe?
The balance transfer sales pitches all have that "We're Your Friend and We've Come to Your Rescue!" type of revelation on them, but would a true friend make the following kinds of statements when making an offer to assist you?
- "We use the highest prime rate listed in the Wall Street Journal ..."
- "Each time you fail to make a payment when due, we may add up to five percentage points to your APR."
- "We will apply payments at our discretion, including a manner most favorable or convenient for us."
The defense rests.