Credit

HOW TO: Be Savvy with Credit Card Balance Transfers Offers

If you own a credit card, you’ve most likely received a balance transfer offer from your existing credit card companies, or an introductory balance transfer rate from a different credit card issuer.

Transferring your balance from a card with a high interest rate to a lower interest rate card may seem like a no-brainer — but there are definitely a few things you should watch for when you decide to transfer your credit card’s balance.

How long will the lower rate last? And what rate will you receive when the rate period is over?

These offers can be fleeting, but make sure to check these figures before venturing ahead. The general time periods for balance transfer offers are six, nine, and 12 months. After that, your balance transfer rate reverts to its normal interest rate, usually at a fairly high 16%. You may occasionally also come across balance transfer offer with rates that last until the balance is paid off, but these offers are usually for higher interest rates.

Why should you pay attention to the balance transfer time limit? If you can’t pay the balance off before the rate changes to a higher rate, and if that higher rate is even higher than your current rate, then any savings you earn during the balance transfer promotion period will be negated as the higher rate takes over.

Example: You have a balance of $10,000 at the rate of 8%. Your monthly finance charge is about $67, or about $800 per year. If you transfer to a 0% interest rate card that has a duration of 12 months, you save about $800 for that year. After the promotional rate ends, your interest rate changes to a high 16% rate.

Let’s assume that for the past year you have paid down the card to $8,000. With the higher interest rate, your monthly finance charge would be around $106, or about $1280 per year! That’s almost 40% higher than the previous year. In just a short while, your interest charges will easily offset the savings you’ve accumulated through the balance transfer; so it’s important to factor in the time limit of the offer, and the rate of that offer after its promotional period ends.

How much fees will the balance transfer cost you?

Balance transfer fees are a very important thing to watch for during credit card balance transfers. Depending on the fee amount, you can easily offset the interest you’ll save with the lower rate. Most offers these days will charge a percentage of a balance transfer, with a minimum and maximum amount set to the fee.

Example: A balance transfer offer has a fee of 3% of what you transfered, with a minimum fee limit of $5 and a maximum fee limit of $75. If you balance transfer $1,000, you’ll be charged $30. If you transfer $3000, you’ll be charged $75 (since 3% of $3,000 is $90, which is over the maximum fee limit).

Balance transfer fees are often buried within the fine print, so find out how much in fees you’re being assessed before you make your transfer. There are many occasions where you may receive offers with no balance transfer fees, but they’ll be clearly stated: “No balance transfer fees are associated with this offer.”

Important Note! More and more balance transfer offers these days are removing their maximum fee limit. This means that a $3000 balance transfer like the example above would cost you $90, instead of the knocked-down $75. A $6000 balance transfer can easily cost you $180 in fees! Pay attention to that percentage imposed on the fee. You don’t know what you might be hit with.

Utilize balance transfer correctly. You can save hundreds of dollars when you transfer from a high interest rate credit card to a lower rate card. Choose cards with long balance transfer period and low balance transfer fees.

Transfer and save. Here are two credit cards with 0% APR for 12 months.

Chase Platinum Visa Card
3% Balance Transfer Fee, capped at $99.
Citi Platinum Select MasterCard
3% Balance Transfer Fee. 0% APR for up to 18 months.

What are the low rates really for?

When you see a balance transfer offer, or an introductory promotional rate, you should read the fine print to see what type of transaction the lower rates are for. In credit card transactions, there are generally three type of transactions: cash advance, balance transfer, and purchases. Each of these transactions have a different rate, with cash advance usually ludicrously high on the ladder.

All this means if your offer was for a low rate on purchases and you transfer a balance, you may not actually be saving any money! Check the terms carefully, as some of the better offers will include low rate for balance transfer and purchases.

If the rates are only for balance transfer, do not make additional purchases on that card. Credit card companies will apply your payments to the lowest rate transaction first! This means that when you make a new purchase on the card, it will stay there, being charged the higher rate, until the other balances are paid off.

Example: You balance transfer $3,000 to a card that has a 0% rate for balance transfers and 16% for purchases. You bought a Nintendo Wii for $250. So when the monthly bill comes, you put an additional $250 onto the payment. Nintendo Wii paid off, right?

Nope.

As mentioned, payments are made toward the lowest rate balance first, so that additional $250 has just been applied to the original $3,000 balance transfer. Your $250 Nintendo Wii purchase? It will continue to sit untouched, accumulating interest at 16% until you have finish paying off the $3,000 0% balance transfer. Ouch!

Always, always pay on time!

Yes, you’re supposed to pay your bill on time regardless of the situation —- but if you currently have a balance transfer on one of your cards, be especially mindful to make your payments on time. Every credit card company will switch your promotional rate to the standard if you miss a payment. If you miss too many times, the standard rate will even become the higher default rate — as high as 30%. In a $10,000 balance, that’s about an additional $3,000 per year in interest charges.

While you’re paying on time, don’t forget to keep making payments to the old card you’re transferring from until the balance transfer has posted. These days, depending on the way you request the balance transfer, it may take as little as a few days or as long as a few weeks for the transfer to complete. You’ll need to make sure payments to the old account are made on time during this transfer period, as you are still responsible for the balances of the old account until it has been transferred completely. If you make extra payments, the credit card company will be able to issue you a credit refund.

Savvy Balance Transfer Check List

  1. Confirm the card’s rate, rate after introduction, and the time period of its introduction rate.
  2. Write down those three figures.
  3. Confirm the fees and write down those fees required to transfer balance.
  4. Continue paying your original card while the balance transfer is pending.
  5. Pay your account with the newly transferred balance on time, all the time!